Don’t Let Taxes Tax You…Again.

19 Mar

I have some nerve just showing up here like this.  It’s been three long months since my last post and there’s nothing I can say to make up for it.  Life took on a life of its own and my ability to blog on sassy financial topics took a back seat.  That’s all I got.  So while I’m not in full swing yet, I did want to update a previous post related to one of our favorite and soon to be due activities - taxes.  Thanks for bearing with me…I’ll be back on track soon!

(The following is a November 2011 post updated for the 2013 tax season with a little new info sprinkled in)

When people think of personal finance, income tax planning rarely bubbles to the top.  Thanks to my good friend Felicia, I was reminded that tax season is just around the corner.  Her question was, how long should I keep tax returns?  My answer – 3 years is recommended because you’re typically safe from audit within the 3 years after you filed, but if you have complicated taxes, it’s good to hold on to your returns for 6 years.

Then her question got me thinking…what should folks be thinking about to prep for filing taxes?

Q:  Do I have to file?
A:  Depends on your filing status, age and total taxable income in 2012.  For example, if you are under 65 and going to file as single, you have to file if your total income is more than $9,750.  But you should always file if you had any federal taxes withheld from wages or a pension, was self-employed, can qualify for tax credits, or owe taxes on tips or retirement plan income.  There are additional conditions; IRS has the specifics - www.irs.gov (Charts A, B and C of the 1040 instruction book to be exact).

Q: What is considered taxable income?
A: 1) Earned income (wages and tips) and unearned income like dividends, interest, disability payments, unemployment, severance pay and securities gain.  Gambling winnings, military allowance, jury duty fees and alimony also count as income (child support does not).

Q: Should I prepare my own taxes or hire a professional?
A:  If you are organized and comfortable with numbers you can do it yourself.  I’m a fan of tax prep software like TurboTax but a pad, paper and the free IRS forms work too.  If you get overwhelmed or have complicated circumstances – own a business or had a change in marital status – you may want to consult a professional.

Q: What if I need a professional but can’t afford one?
A:  If in 2012 your household had total income less than $51,000, you qualify to receive free tax preparation services at any Volunteer Income Tax Assistance Program (VITA) site.  To locate your nearest VITA site, call 1-800-906-9887.

If you don’t qualify for free assistance, talk to your family, friends or coworkers about the services or professionals they use.  But don’t just go off their recommendations.  Schedule a consultation and ask questions before you give them all your personal info: what’s their fee structure (flat or base plus depending on complexity); what “extras” like audit protection or electronic filing is included; and, will they be available throughout the year for any follow-up questions or advice?

When comparing fees, it may be helpful to note that the National Society of Accountants in their 2012 fee study reports the following average prices charged by their members:

  • Average for 1040 with Schedule A and state return: $246
  • Average for 1040 with state return with no itemized deductions: $143

The average prices at franchised tax offices were:

  • H&R Block: $192 per return
  • Liberty Tax Service: $173 per return

While not inexpensive, a thorough and accurate return (plus peace of mind) may be worth the dough.  (But stay away from the ones that promise a big refund that you can receive immediately. Totally no bueno. See also Why Pay For A Refund When You Can Get It For Free).

Q:  What forms do I need?
A:   There may be one or several depending on your situation. Here are some common ones mailed to you in the beginning of the year.

  • W-2, from an employer that shows wages paid and taxes and other deductions
  • 1099, the miscellaneous income statement: interest (1099-I), dividends (1099-DIV), contractor income (1099-MISC), social security income (1099-SSA)
  • 1098, mortgage interest paid
  • 1098-E, student loan interest paid
  • 1098-T, tuition statement
  • K-1, if you have income from a partnership, small business or trust.  (Note, this is an IRS form you complete.)
  • Your receipts, cancelled checks or list of tax-related expenses.  If you don’t know what’s tax related, do like l do and print all expenses for the year and figure out which are tax-related as you answer the questions in the software/tax booklet or from the preparer.

Q:  When can I file?
A:  You must file by April 15, 2013.  Savings To Inve$t has a great post on tax dates and deadlines: http://www.savingtoinvest.com/2012/12/when-can-i-file-my-taxes-in-2013-and-other-key-tax-filing-extension-and-refund-dates.html.

If you have more questions, most tax professionals will answer questions for free before they get really busy, the library typically has previous year tax books and IRS publications, and of course, there’s always Google.  Take advantage and get started before the clock strikes midnight on April 15.  Taxes don’t have to be taxing (pun totally intended).

On your mark, get set, and give!

26 Dec

Christmas is over.  Maybe you volunteered, maybe you went to church, maybe you don’t even celebrate Christmas but you had a great day off with family or friends.  Regardless, you’re probably all warm and fuzzy and still in the giving mood.  Perfect timing for the thousands of nonprofits that going full throttle with year-end fundraising campaigns.  Does “it’s not too late to get in that last minute tax deduction” sound familiar?

But I ain’t mad at them.  Between now and January 1, people will be reflecting on the last 12 months, how blessed they’ve been or blessed they will be in the new year.  Guards are down, emotions are up.  Prime time for nonprofits to tug at the ol’ heart strings, which if you didn’t know, are directly connected to your wallet.

The December 2012 issue of Real Simple (RE) magazine has some good guidelines for selecting the right nonprofits for your charitable giving goals.  Here’s a few they mentioned, with my take of course.

  • Make sure you understand the charity’s mission.  Broad statements like “eradicating poverty” is noble, but it doesn’t really say what they do.  Food bank, financial assistance, or family planning…how would you know from two words?  Most solid organizations have the following information readily available on their website or in their printed materials: mission statement, key initiatives, who benefits, how they measure their impact, and data on the results of their efforts.  If it’s not available, call the organization and ask to speak to a program manager.  If that still doesn’t give you the information you’re looking for you may want to cross them off your list.
  • Check the spending ratio.  Nothing is worse than hearing that for the price of a cup of coffee a day you can feed an entire village for a year and later finding out that only 10% of your dollar actually made it to the village and only half of that went to food.  What really happened to that child in my sponsor packet? RE states that most efficient organizations spend at least 75 percent of their budget on programs and services, a.k.a. the spending ratio.  The rest of it goes toward expenses to the keep the lights on, pay the staff, etc.  The higher the ratio the better, but if an organization has a ratio of less than 75 don’t rule them out completely as sometimes administrative costs may be high for just that year (e.g., new facility or increases in staff for upcoming programs).  You can check spending ratios at CharityNavigator.org.
  • Know who’s running the show.  Well-run organizations are open about their management – people and practices.  RE states there should be a governing board that includes not just the president or CEO but also at least five people who are not employees of the charity but have experience or a connection with the charity’s type of work.  The Better Business Bureau Wise Giving Alliances (give.org) and CharityNavigator.org evaluate nonprofits on their accountability and transparency.  However, if you’re concerned about an organization’s religious or political affiliations you may have to do more digging.  Most nonprofits mention that sort of stuff in the mission or goals but if it’s unclear, check the annual report (which should be available online) to see how much money goes toward political or religious activity.

I’m all for the reason for the season, so give, give and give some more.  But be smart about it: 1) think about how much you can and are willing to give; 2) research your organizations; and, 3) make sure you get a receipt for tax purposes.  If you’re pushing to meet the 2012 deadline, take advantage of the moment and plan for 2013.   Who doesn’t love warm and fuzziness all year ‘round?

Happy Holidays! With a big XOXO from Sassy Dough.

The Cost of a Vote

6 Nov

At some point in our country’s history – regardless of your ethnicity, race, gender or religion – someone somewhere championed, fought, prayed or died for your right to vote.  And yet the ability to express your opinion or choice by casting a ballot cost you nothing.  Don’t pass up a free shot to influence. Vote. Today.

Knowing When to Hold or Fold, Part II

29 Oct

A couple weeks ago, I posted about my HomeGirl trying to figure out what to do with her company-issued stock options.  Feedback from my crew indicated that my post was a bit complicated.  Sometimes I get into my zone and want to show what I know.  It’s the only child in me.  My bad.

So, let’s take a step back.  How do you know if a stock is going to rise, fall or stay steady?  How do you know if you should hold or fold?

From a financial perspective, your decision to sell or keep a stock is a combination of your overall investment strategy, appetite for risk, and where the stock fits within your portfolio (diversification).  There are several different methods to evaluate stocks, fundamental vs. technical analysis for example, but those are methods people get paid to do.  Let’s stick to things we can do on our own…

  1. Look at the company’s earnings, management, and operations – past, present and future.  Basically you want to kick the tires.  Is the business model profitable?  Are they keeping expenses down?  Are they growing while maintaining a healthy position in the market?  What’s their mission, objectives, strategic direction?  You can find this in the company’s annual reports (usually found on their website or http://www.edgar.gov), independent news coverage and on websites like The Wall Street Journal or Yahoo! Finance (finance.yahoo.com).  This  may sound a bit daunting if you don’t have a financial background but your common sense plus the vast amount of commentary available in the different sources will shed more light than you think.
  2. Watch the stock price.  A stock is a piece of the company.  One share is equal to one slice of the ownership pie. Generally, if the company is doing well, investor confidence goes up, more people want shares, the price goes up.  If the company is not doing so well, investor confidence decreases, stockholders start to sell, the price goes down.  A more valuable stock usually has a rising stock price and vice versa.  Looking at the stock price over a specific period of time will show the trend – has it continued to rise, suffered some dips, started to decline? There are several online resources that will help you chart the price or even provide the trend line along with some helpful analysis like The Motley Fool (www.fool.com) and MSN Money (investing.money.msn.com).
  3. Check out the stock’s position in the broader market.  Is the stock performing well compared to its peers?  Compared to a market index like the S&P 500? A straightforward way to determine this is to look at the stock’s P/E ratio, formally known as the price-to-earnings ratio.   For an individual stock, it’s the price of the stock divided by the company’s earnings.  As earnings go up, the share price should go up, making it more valuable.  And in general the higher the P/E ratio the stronger the stock.  For the market index, it’s the…oh, just look it up on The Wall Street Journal website (http://online.wsj.com/mdc/public/page/2_3021-peyield.html).

    For example, if Stock A’s price is $30 and the company’s earnings are $10 per share (that’s the company’s annual earnings divided by total number of shares outstanding) the P/E ratio is 3.  If Stock B’s price is $20 and the company’s earnings are $4 per share, the P/E ratio is 5.  Conventional wisdom would say that Stock B is the better performing stock, it’s more “expensive” and more valuable.  But let’s say the S&P 500 has a P/E ratio of 13.  Both stocks are on the “inexpensive” side, possibly undervalued, or worse, not keeping up with the general economy.

    You can also look at the dividend yield which shows how much a company pays to it stockholders as a percentage of the stock price.  Again, higher is generally better: the company has more earnings to pay to shareholders in the form of dividends which is a sign of strength and growth.  So let’s say Stock A pays $1 dividend per share and it’s price is $30; it’s yield is 3.3%.  If Stock B pays a $2 dividend per share and it’s price is $20, it’s yield is 10%.  So again you’d choose Stock B.  But what if average of the S&P 500 stocks is 2.1%.  The stocks are paying more than the market index, so they might be a good value after all.

While not a complete handbook on picking stocks, these are some simple things to examine.  There are far more complex methods you can use and some of it is also intuition or just plain luck.  And note how I tried to generalize as much as possible.  All the various ways to go about this underscores the need to check a variety of factors before determining whether to buy, sell or hold…and at the end of the day, you still may not quite know what to do.  Sorry, but it’s true.  Just make the best decision that you can with the information you have.

Speaking of information, for more detail, I would consult an easy to read text like The Wall Street Journal’s Complete Money & Investing Guidebook.   Investment clubs are also a good way to get introduced to the world of investing, picking and assessing stocks in particular.  And of course, your friendly financial professional would be more than willing to help.

As always, thanks for reading and let me know what you think.  Special shout out to Felicia for the good feedback – it takes a village to keep it smart and sassy…

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National Don’t Cosign Day

9 Oct

Today is the birthday of the man who jacked up my credit.  In honor of the lesson he taught me, I am declaring October 9th as National Don’t Cosign Day.  (Not sure if I have that power, but whatever.) Coincidentally one of my favorite NPR shows had a segment on the perils of cosigning.  I’ll steal a line from one of the guest and share that “you shouldn’t cosign for a pack of gum.”

Cosigning is often an emotional act rather than a financial one.  As a former cosigner, the desire to help someone obtain something they want or need is part of being in a caring relationship.  As a mother, you want to help your daughter get her first mortgage.  As a friend, you want to help your BFF move into a nicer apartment.  In my case, the boy said his credit was bad because he had cosigned for his cousin.   It pulls on the ol’ heart strings.  But you also assume that the person will be extra diligent in making sure that the debt is repaid on time, because it’s not just their credit at stake.  They care about you too, right?

Sure they do, but according to the Federal Trade Commission (FTC) three out of four cosigners are asked to pay the loan.  Why?  Because the issues that impedes the borrower’s ability to solely qualify for the loan in the first place are going to be there whether you cosign or not.  They mean well, but if they don’t make enough money, have competing financial priorities, or just aren’t good at managing their money, more than likely they won’t repay the debt on time or at all.

The FTC website states that under federal law, creditors are required to give you a notice that explains your obligations as a cosigner. The notice states:

You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.  You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.  The creditor can collect this debt from you without first trying to collect from the borrower.* The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.  This notice is not the contract that makes you liable for the debt.

* Depending on your state, this may not apply. If state law forbids a creditor from collecting from a cosigner without first trying to collect from the primary debtor, this sentence may be crossed out or omitted altogether.

This must be new because I don’t remember seeing that…or maybe I didn’t read it.  I think I was blinded by love (and stupidity apparently) and I can’t front, the idea of driving around in a spanking new 535i was exciting.  Shame on me, shame on him.

So, take a lesson from me (and the FTC).  Before you cosign, consider the following:

  • Be sure you can afford to pay the debt. This deserves repeating: be sure you, and you alone, can afford to pay the debt.  If you can’t, your creditworthiness can go down the tube and you could be sued for what’s due.
  • Even if you’re not asked to repay the debt, the loan shows up on your credit report and affects your debt to income ratio  and your FICO score.  If you’ve got some credit needs coming up, you may want to think twice about adding another debt.
  • Ask the lender to agree, in writing, to notify you if the borrower misses a payment. If only I had done this. It could have save me the shock of hearing from my mortgage broker, “Your BMW loan is more than 90 days past due.”  Motherfu….
  • Make sure you get copies of all important papers like the loan contract, any disclosures, and warranties. Not that this absolves you of your responsibility as a cosigner, but at least you have all the documentation in case you need it.

Thankfully, the BMW account was the only blip on my credit and the damage to my score was short lived.  But the damage to my bank account took a while to correct.  After all was said and done, I paid a ridiculous amount of money to satisfy someone else’s debt.  Time heals all wounds so I’m over it, but it still baffles my mind at times.

So in honor of National Don’t Cosign Day, think of me and pay a bill on time.

Knowing When to Hold or Fold, Part I

8 Oct

You got to know when to hold ‘em, know when to fold ‘em
Know when to walk away and know when to run.
(Sung in my best Kenny Rogers voice.)

Since I decided to keep a personal finance blog, my friends have determined that I am money-omnipotent. Little do they know, that I’m learning as I go along (note disclaimer at the bottom of the site) and every question encourages me to learn more, so I’m happy to research topics and share what I find. Thanks to my HomeGirl in ATL for this post…

Here’s the scenario:

  1. HomeGirl (HG) received company stock as part of her promotion last year. The corporation gave HG 100 shares and placed them in an account in her name administered by a third party brokerage firm (think Fidelity or Ameriprise). The stock cost the company $10 per share. This is also HG’s exercise price or grant price; the price per share she will pay to purchase the stock, regardless of the current share price or fair market value (FMV) at the time of purchase.

    The catch is that she doesn’t yet own the shares; she has the option to buy them by a specified date but there’s no obligation. Now this could go one of two ways – if the share price rises above the grant price, she wins. If the share price falls below the grant price, she loses nothing because she never bought them. As with all stocks, stock options are risky and should be carefully considered when viewing them as part of your financial resources and goals.

  2. The option to exercise expires early next year. To exercise means to take the option granted; the options in this case are to buy the stock from the company at the price of $10 per share. If HG fails to exercise the options within the specified time, the options have no value.
  3. The current share price is at an all-time high, $40, so buying at the grant price is very attractive. If she were to exercise all 100 stock options today at $10 per share, her gross profit would be $30 per share, or $3,000. Of course she may have to pay brokerage fees and she’ll definitely have to pay taxes, but I’ll get to that.
  4. In exercising her options, she has, well, three options:
    • Exercise and hold. Basically, she buys the shares at $10 each, and then holds them in the brokerage account. HG won’t get any cash back, but she now owns an investment portfolio worth $4,000 (still assuming the FMV is $40 per share).

      Let’s say in two years the price rises to $50 per share. If she were to sell in two years, her profit will be the FMV ($50) less the grant price ($10) and she’ll have to pay capital gains tax on the profit ($40 x 100 shares). If the price falls, her portfolio loses money, and she does nothing but cry…and then determine when to sell before the price drops below the grant price so she won’t lose everything.

      Note: the taxes you pay depends on when you sell. If you sell your stock options within one year after the stock options were exercised and within two years after the grant date, you pay ordinary income taxes, rather than capital gains, on the option transaction (the difference between the sale price at the time exercised and the grant price). For most people, ordinary income tax rates are higher than the capital gains tax rate.

      This option is best if you have faith that the company’s share price will continue to rise. You can just hold the shares until you’re ready to sell, preferably after one year to minimize taxes.

    • Exercise and sell-to-cover. With this option, HG buys the shares for the grant price, and sells enough shares to pay the associated taxes and fees. The remainder stays in the form of shares. So let’s say the total cost to sell (taxes and fees) is $2,000. HG would sell 50 shares at the FMV of $40 per share to cover the taxes and fees and have 50 shares in her portfolio worth $2,000.

      This option is best if you think the stock price will moderately appreciate and you want to hold on to some shares as part of your investment strategy. It’s also beneficial if you exercise within two years of the grant date and want to pay the (higher) option transaction taxes out of proceeds. However, you will have to capital gains taxes on the sale of the remaining shares if they rise in value.

    • Exercise and sell. HG can buy the shares for ten bucks each, then sell the shares for $40 each, pay the taxes and fees out of sale proceeds (still $20 a share), and keep the remainder of the money, about $2,000.

      This option is best if you don’t think there is much room for the company’s stock to grow and you want to cash out and use the money for a good and responsible reason. To all my HGs, a Louis Vuitton Alma PM handbag is not a good or responsible reason. Say it with me, not a good or responsible reason.

So what did HomeGirl do? Nothing. The stock price has been rising steadily and she doesn’t need the money today. She has some time to decide.

That concludes Part I. I know, smart reader of mine, you’re probably wondering how do you know if a stock is going to rise, fall or stay the same and therefore, how do you know which option to take? Stay tuned for Knowing When to Hold or Fold, Part II, coming soon to an inbox near you.

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iPriorities

23 Sep

A friend is going through some serious money challenges.**  In short, monthly cash flow is not enough to cover monthly expenses.  Period.  While chatting the other night, she reamed her husband for purchasing Tropicana Premium rather than the store brand, accusing him of not thinking critically about their situation…but then after her tirade, she told me she bought him an iPhone 5 for his birthday.

Hunh?

I wasn’t quite sure what to say.  I understand the strange desire to be one of the first to get new cool technology.  I have been called in the most loving terms a “gadget whore” by ex-boyfriends who were suspiciously annoyed at my early adopter tendencies.  “Are you going to buy it? No? Then don’t count my money” was my response.  A little insight as to why I’m still single.

But I digress.  While $199 probably won’t save my friend from her current predicament, the decision to make a relatively costly and unnecessary purchase is indicative of how they got in this mess in the first place.  Putting on my nerd hat for a minute, applied behavioral economics would tell us that people are present-oriented: we prefer to have things now rather than save to have things later and the desire to do better is not enough to change behavior.  But behavioral economics also tells us that we need prompts and affirmations that encourage us to do things differently.  Set a goal, make a plan and make it automatic, a.k.a. setting and forgetting.

Given this, my flippant response of “instead of getting an iPhone, get some iPriorities” wasn’t encouraging.  I need to work on that.  (I also said, “ And your annoyance at your hubbie for buying fancy juice has nothing to do with money.”  That was unnecessary, but come on – orange juice!?)

Since I have no specific advice with post, I’m just going to tell you what I should have told my friend:  think about your needs vs. your wants and be consistent and contentious about how you spend your money.  Stick to the plan.  It will get better.  You can do this.

I think I have a phone call to make…

 

**Example slightly changed to not lose friends by putting their business in the street.**

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Fall Check-Up

16 Sep

Woe is me…I haven’t blogged for some time.  Summer got the best of me.  Happy hours, barbecues, weekends away…August was full of fun and frolic.  But now it’s September, and even though the weather is still fabulous there’s something about Labor Day that tends to shut the fun down.

September is also the month that all of my insurance policies come up for renewal.  But this year instead of just renewing and paying the premiums, I reviewed and asked questions.  The same way we annually schedule our doctors appointments to make sure the body is in tip-top shape, we need to annually (or even more frequently) reassess our financial needs, which includes insurance.   Imagine if your doctor just reviewed last year’s examination and asked, “You good?”  And you answer, “I think so.”  Done.  That’s basically what happens if you don’t review or update your insurance policies.

So what did I do?

  1. Changed my co-op and car insurance provider.  Lucky for me, my friends are ambitious.  One of them just started his own State Farm agency and in order to woo me to his client roster he reviewed my existing policies to see if State Farm could match or beat.  And beat they did…by increasing the deductible just a tad on my co-op insurance, but also increasing my coverage, I’m able to save $50 a month.  With the exact same coverage on my car, I save an additional $20 a month.
  2. Renewed my home warranty plan.  At times, homeownership is a pain in the ass.  Fix this, replace that.  I come from a long line of callers, being handy is not in my DNA.  If something breaks, we called someone to fix it.  However, the cost of service calls and repairs is going nowhere but up and dishing out $6,000 to replace my hot water heater would not be fun.  So for peace of mind and bank account, I paid $300 to renew my home warranty plan.  (I took a break after buying new kitchen appliances, but now that the manufacturer warranty has elapsed, who knows what will happen.) At $85 a service call and guaranteed replacement of every appliance in my apartment for a fraction of the retail cost, I rest easy that if something conks out, I won’t pass out at the price.
  3. Got disability insurance.  Until I get it together, I will rely heavily on my salary…for everything.  If something were to happen to me and I was unable to work, sucks to be me.  Scary.  Using the savings from my car and coop insurance, I obtained a policy that will give me 80% of my salary should I not be able to work due to illness or accident.  Given that I spend a significant portion of my salary on discretionary items, 80% should be just fine.
  4. Signed up for Long-term Care Insurance (LTCI).  After a quick come-to-Jesus meeting with my net worth, I realized that I may not be saving enough to cover my living expenses in retirement AND any unforeseen health care costs.  With no hubs or offspring in the near future, I’m pretty sure I’ll be relying on myself to take care of myself when I’m unable to take of myself.  You follow me? Ergo, I purchased a LTCI plan.  Now, LTCI isn’t for the faint of pocketbook.  It’s costing me $112 a month.  But given that I can spend that on a Friday night, I figured I could manage accordingly and actually be sober for 10AM Zumba.

Now ramping up on insurance doesn’t mean that I’ve abandoned other financial goals, particularly my savings goals. I’m still on track to replenish my emergency fund and continue contributions to my retirement fund.  Instead of an extra expense, think of insurance as a financial tool, a safety net for life’s expensive surprises.   But make sure you review your various coverages on a regular basis to ensure that they continue meet your needs.  What good is a safety net with holes in it?

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In Vacation Mode? Tips for Travel Budgeting

4 Jul

Today I am feeling particularly relaxed.  Not because today’s a national holiday but because I am still in vacation mode.  It’s been almost a week and mentally I’m still by the pool lounging and laughing with some great girlfriends.

But vacation planning is a tricky thing.  How do you save during the year for something that takes place once or twice a year?  If you know you’re going to Europe next year, you can search for the best deals, develop a budget, and save enough to pay in full for all travel, lodging, meals, and any activities you feel like getting into.  But if you just find out that your homegirl’s bachelorette party is in Vegas in two months, and you don’t have ample savings or leftover monthly discretionary income, you might not be able to swing it.  “Have credit card, will travel” may help in a pinch but it’s not a motto to live by.

So what’s a fun-loving gal to do?  My advice is go ol’ school.  When I first started working, I participated in my bank’s vacation club.  Throughout the year, I deposited a small amount into a savings account which could be withdrawn in full on a predetermined date (usually a year from opening or some point during the summer).  At 21 year old, this method worked well – I could estimate how much I would be able to spend on a trip or two and I couldn’t dip into it to pay for non-vacation items.  There are some community banks and credit unions that still offer such a product.

At 40, my vacations are more frequent (and expensive) than they were 19 years ago.  But the vacation savings account method still works for me.  I usually know I’m going somewhere significant three to six months beforehand which gives me time to estimate a budget and start saving.  I back into two weeks before my travel date and determine how much of my check I need to put into my reserve account (or how much of my monthly spending I need to curb).  This includes daily spending money which I usually carry in cash to make sure I don’t reach for the debit card too often.  If I’m traveling somewhere that cash isn’t the safest option, I use my credit card but track charges while on the trip and pay the balance when due with my vacation funds.

A few other things that have worked for me:

  1. Use miles/points when you can.  I use a credit card for most of my reoccurring bills and monthly purchases so I build points that can be used for all kinds of things, like air miles.  This way, as I use points, they are constantly being replenished.  For my recent trip, I used miles to pay for half of my airfare which kept it within a reasonable amount.  Note: only use this option if you can pay off the credit card each month.
  2. Search for the best prices but buy from the source.  What I’ve found is while kayak.com, travelocity.com and orbitz.com are great aggregator sites, if you go directly to the airline/hotel/car rental place with the lowest price, you may get it a tad bit lower.  Plus you get the convenience of dealing with the customer service folks of the actual merchant, avoiding the middleman, if you have any issues with your reservation.
  3. Go with a group but pay solo.  Sorry friends, but if you can’t pay for your trip, I’m not fronting you the cash.  May sound like a no-brainer (or that I’m mean and nasty) but I have been duped into buying the tickets all at one time (“so we can fly together”…whatever), or putting the entire room bill  on my card and never getting reimbursed.  First time, shame on you; second time, shame on me.
  4. If traveling internationally and carrying a wad of bills isn’t an option, use a credit card with the lowest international transaction fees.  Some cards charge a flat rate, like $6 per transaction, while others charge a percentage (e.g., 3% of the total transaction).  You should call customer service at least 3 days before you go find out the rates and give the company, particularly if it’s a local or regional bank, time to authorize your card for international use.

But if a far-and-away vacation is still not within your financial reach, no sweat.  Opt for the stay-cation.  I have had many of fun trips right in my backyard – wine tastings, outdoor concerts or movies, checking out a nearby bed-and-breakfast, crashing the pool at a friend’s apartment complex.  Most cities have inexpensive or free fun local activities (the Friday paper always has a Weekend section), so checking out for a bit doesn’t have to drain your checking account.

Happy 4th – here’s to summer! Enjoy.

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Confessions of Chronic Car Lessee…

15 Jun

**My dear readers, it’s been a busy few months.  In the words of grand lyricist Rakim, “It’s been a long time, I shouldn’t have left you.”  But I’m back and ready to blog.**

Here’s a peek at what’s been going on in my life…

This month I entered my third car lease.   Six and half years ago I took my first hit – a 39-month lease with no money down and routine maintenance included – and I haven’t been able to kick the habit.

So what, you ask?  Here’s what…every time I tell my friends I lease they exclaim “why?” and not in a good way.  But I get it.  Essentially when you lease a car you pay for what you use and at the end of the lease you can either buy the vehicle for the resale value or turn it in…but you don’t own anything.   Why would I do that?

In the beginning, it was all about the monthly payment.  I had a tight budget, needed a car immediately, and didn’t want to spend money on something I wasn’t sure I would like or need in a couple of years.  Leasing is usually cheaper than buying given the difference in what’s financed.  Your lease payment is based on the price of the car less the resale (or trade-in) value.  So if the car costs $15,000 and in 3 years the resale value is estimated at $8,000, you’ll only pay for the $7,000 over the next 36 months.  While you may not have to put any money down, you do have to pay sales tax and some dealer fees.  You also have to commit to only driving a certain number of miles a year – 12, 000 or 15, 000 – and pay upwards of 15 cents per mile if you go over the limit at the end of the lease. 

Now with buying, you would pay the entire $15,000 plus any finance charges and fees.  Typically, unless you’re paying in full with cash, you make a down payment and get a car loan with an interest rate based on your credit score.  (They check your credit if you lease but only to really see if you can afford the payment and have a good payment history.)   At the end of your loan the car will be worth less than what you paid for it (the depreciated value), but you own it. 

Conventional wisdom, and my judgmental friends, will always tell you that owning is best.   Building equity (also called the resale or trade-in value) and having control over how and how often you use it are the attractive aspects of owning a car.   With a lease, you have to keep the car in good shape or you’ll pay for excessive use when you turn it in.  When you own, you can paint it, throw some d’s on it, or supe it up.  Drive it till the wheels fall off.  And when you pay the car loan off, you’re no longer saddled with a monthly car payment. Nice.

So why would someone continue to lease a car?  I know why I do – I’m lazy and I like new stuff.  (Somewhere a financial planner just got sick to their stomach.)  Look, I know nothing about cars, I don’t want to know anything about them, my car payments are reasonable and I don’t drive that much.  At the end of my last 36-month lease I had a total of 19,642 miles on my car.  It had all kinds of little dings and dents that come with city driving and I fixed nothing.  Free oil changes and the like and the car’s never out of warranty.  And then after 156 weeks, I just turned Gaby in (that was her name) and rolled out with a newer model with more bells, whistles and safety features for an extra $40 a month.   I call her Roxy.

Yet, in full disclosure and contradiction, leasing is not a good option if you don’t have a stable income, need to move or change jobs every so often or expect significant life changes.   Ending a lease early is an expensive ordeal.  It’s also not cost efficient in the long-term. (Somewhere a financial planner is sighing in relief.)  At the end of this lease I will have paid for a car for over 10 years and have nothing to show for it except an ice scraper and a handful of obsolete phone chargers.  In fact, I may have paid more than the cost of ownership given the sales taxes and initial lease fees I pay every three years.  Plus, I have to go through the excruciating paperwork and process each time.  No offense to the car dealerships of America, but I really can’t stand you.

As with everything, there are positives and negatives associated with getting a car.  Whether you lease or buy, make sure you go with a reputable auto maker or financing company.  Do your homework and consult a finance professional when in doubt.   And who knows you may decide that public transportation, the Zipcars of the world, or a good old fashioned 10-speed (with a helmet!) may be the way to go.

However you get there, enjoy and safe travels.

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