Free Mound of Money Newsletter Want to receive the latest financial planning information sent straight to your email? Get all the latest and greatest insights from Mound of Money for FREE!

Simple And Right On

Here is a great little article.  I wish I had written it. Usiere Uko is a great writer on this subject. You will be blessed to have read it. http://www.financialfreedominspiration.com/2012/10/between-financial-freedom-and-independence/

Check out his site.

G. Herbert

November 1, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

What Tax System Are They Talking About?

 I’ve had it!  Really I just can’t take it anymore!  I was just listening to the Presidential Debates.  What tax system are they talking about?  I don’t recognize our U.S. tax system in what they are talking about.  Now I give you it is not as simple as it could, and should be.  But it does have set rules, terms that mean something and works in a certain way.

 I’ve taught our tax system in classes for decades.  Once it is explained and the correct terms defined and used it really is pretty simple.  However our politicians (on both sides) either don’t understand how it works or they misuse the terms to their own advantage, to confuse folks.  There are several very important terms that are used rather interchangeably but have specific meanings and when they are used incorrectly they can REALLY mislead us in understanding what is happening.

I’m going to explain how the Form 1040 is completed.  Wait, you say, “I have done one every year for ever.  I all ready know about it.  I want to know how the tax system works.”  I have found, as you will see, if you understand how this form is laid out you will understand how the entire (well almost entire) system works and MOST importantly you’ll be able to understand and discern  the “Gobbledeeguck” our politicians try and pull over on us by using misused terms.  Understand the Form 1040, how it is laid out and the terms used and you’ll understand the system.

Let’s go…….

Here is a simple (I’ll get into the details in just a bit) formula of how taxes are figured.

 

Gross Income

–   Adjustments

=  Adjusted Gross Income

–   Deductions/Exemptions

=  Taxable Income

X  Tax Rate

=  Total Tax

–   Tax Credits

=  Tax Due

–   Payments Made

=  Refund or Amount You Owe

Let us deal with some terms—–

These are short but pretty good definitions, but not complete.

INCOME:  Wages, commissions, fees, interest, dividends, gain/loss from a business               (Schd. C), taxable refunds, capital gain/loss (Schd D), IRA distributions, pensions and annuities, rental real estate, royalties, partnership income, S Corps, trusts, unemployment compensation, farm income (Schd F), taxable Social Security benefits, etc..

Adjustments:  Education expenses, Health Savings Account, moving expenses, deductable part of self employment tax, IRA deduction, student loan interest, etc.  You may take these amounts within limits.

Adjusted Gross Income:  This one’s simple…Total Income less Adjustments = A.G.I.

 

Deductions:  Taxes paid, interest paid (mostly mortgage interest)(credit card interest etc. is no longer included, sorry), gifts to charity, misc., etc..

You may add up and then subtract these amounts (with some limits) from you’re A.G.I. {Here is an example of when you need to know what A.G.I. is}. You may then use the figure you just got or a Standard Deduction (A fixed amount set by the IRS, whichever is BIGGER).

Exemptions: Here you add up the number of qualifying individuals (You, your spouse, qualified dependants (No your dog or cat don’t count, even if they are more expensive and more loving than the kids). Then multiply that number by a figure, depending on how you file  – individual, married filing jointly etc..

Now that you understand the difference between deductions and exemptions the next time you see that very pregnant woman wearing that shirt, with a big arrow pointing at the baby-bump and it says “Tax Deduction”, you’ll know that it is really an Exemption and not really a Deduction.

RECAP…

Gross Income – Adjustments = A.G.I. – Deductions/Exemptions = Taxable Income

IMPORTANT POINTS:

There really is a difference between Income (What you make) and Taxable Income (What you pay taxes on).

Gross Income is NEVER less than Taxable Income.  Taxable Income is ALWAYS less than Gross Income.

OK, we’ve figured out your taxable income.  You have every right to lower this amount as low as the law allows.  You have NO obligation to pay a penny more in tax then the law requires. Don’t let ‘em tell you anything different.

We have what is called a “Progressive Income Tax”.  I’m not making a political statement here (maybe in another post).  What this means is that the more Taxable Income (remember that term and how it is figured?) you have the higher the rate (or percentage) you pay on the next step (bracket) of Taxable Income.

Here is the current (as of this printing) tax chart (sometimes called tax table).  I’ll go over it with you in just a bit.

 

Married Filing Jointly* or Qualified Widow(er) Filing Status

 [Tax Rate Schedule Y-1, Internal Revenue Code section 1 (a)]

                                                                    10% on taxable income from $0 to $17,400, plus

15% on taxable income from $17,400 to $70,700 plus

25% on taxable income from $70,700 to $142,700, plus

28% on taxable income from $142,700 to $217,450, plus

33% on taxable income from $217,450 to $388,350, plus

35% on taxable income from $388,350.

 

{So, when someone says they paid 40% to Uncle Sam in taxes… what are you going to say?}

*I’ve used Married Filing Jointly because it is so often used.  Single, head of household etc. will be different.

As you can see all levels are figured with TAXABLE INCOME.  NO other type of income matters here.  Remember that!

 

Let’s take a look at 3 different examples and see how increasing income tax brackets affects the amount of tax you actually pay.

——————————————————

EXAMPLE # 1

 A family of 2 adults and a Gross Income of  $33,000 – $18,000 (Exemptions & Std. Deduction) leaves us a TAXABLE INCOME of $15,000.

Go to the Tax Table – 10% X $15,000 (All under $17,400) = $1,500 Total Tax – That’s it!

Please note: The first  $18,000 was taxed at 0%.

The next $15,000 was taxed at 10%

Thus:    Tax Bracket – 10% Marginal (top)

Total Tax paid – $1,500

Effective Tax Rate – 4.5% ($1,500 ÷ $33,000)

 This family paid 4.5% of their Gross Income in Federal Tax (Effective Tax Rate).  They will pay 10% on the next $2,400 ($17,400-$15,000) of Taxable Income (Marginal Tax Bracket).

 ——————————————————

EXAMPLE # 2

A family of 2 adults and a Gross Income of  $68,000 – $18,000 (Exemptions & Std. Deduction) leaves us a TAXABLE INCOME of $50,000.

Go to the Tax Table – 10% X $17,400 ($0 to $17,400)                  = $  1,740

15% X $32,600 ($17,400 to $50,000)     =     4,890

$ 6,630  Total Tax

Thus:     Tax Bracket – 15% Marginal (top)

Total Tax Paid – $6,630

Effective Tax Rate – 9.75%

This family paid 9.75% of their Gross Income in Federal Tax (Effective Tax Rate).  They will pay 15% on the next $20,700 ($70,700-$50,000) of Taxable Income (Marginal Tax Bracket).

 Now, if someone says this person is paying 15% in taxes are they correct?  A: YES and NO!

 ——————————————————

EXAMPLE #3

A family of 2 adults and a Gross Income of  $255,000 – $18,000 (Exemptions & Std. Deduction) leaves us a TAXABLE INCOME of $237,000.

Go to the Tax Table – 10% X $17,400 ($0 to $17,400)              = $  1,740

15% X $53,300 ($17,400 to $70,700)     =     7,995

25% X $72,000 ($70,700 to $142,700)   =   18,000

28% X $94,300 ($142,700 to $237,000) =   26,404

$54,139  Total Tax

Thus:      Tax Bracket – 28% Marginal (top)

Total Tax Paid – $54,139

Effective Tax Rate – 21.2%

——————————————————- 

 OK NOW….lots of numbers and lots of words, but what can I get out of this?

Words do have meaning!

How ‘bout this question?  “I heard that a REALLY rich man, with millions of dollars of income is paying less than his secretary (I thought they stopped using that term?) in taxes, could that be true?”  I doubt that it is the Total Taxes Paid!  I could see where, if the Employer had a great deal of deductions (from the business, the secretary wouldn’t have), they could pay similar rates.  But that would be a very unfair comparison, where she couldn’t have the same high deductions.  So when you hear someone say I/he/they pay X% in taxes as compared to someone else you know the right questions to ask.  RIGHT?

One more VERY Important point (and the topic of another future post).  Can you see how to lower what you pay in taxes from this explanation?  NO?  Then watch for the next post.

 

“If common sense is so common…why is there so little of it?”

October 30, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

Financial Freedom or Independence?

I just was reading in a very fine blog some thoughts about the difference between Financial Freedom and Financial Independence.  While I believe these two terms may be interchangeable much of the time, the author makes some very good points.

 Financial freedom means different things to different people. For many, it is freedom from having to work, which is actually financial independence. One key characteristic of financial freedom is freedom from financial worry, being a slave to money and having money dictate what you can and cannot do. There is no threshold amount of income to signify financial freedom. Your mindset is also a huge factor. You can have a lot of money but be poor in your soul, living under the shadow of financial worry and fear of losing it all. When you are still a slave to money, no amount of money can set you free. In the final analysis, financial freedom is much more than money. (Italics added).  It is freedom to truly be yourself, whereby your expectations and reality meet. It is a place of fulfillment. It usually occurs when dreams come true – when you have given your best, and get rewarded beyond your wildest imagination.

I really like the comment on being “poor in soul”.  Money is a tool and not an end in itself…or at least it should be.  Why do we accumulate money…to get a bigger total than our friend…to live better than our neighbor…or to live the way we wish in our own heart?

I like what this author says and I am going to keep reading.

October 8, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

Cut Your Inkjet Printer Costs 37%

I have come upon a way to cut my costs for inkjet ink cartridges by at least 37%.  It’s simple, costs nothing and works like a charm.

 I’ve been using an Inkjet printer now for over 9 years.  Sam’s Club has given me preferred parking because of the amount I spend on ink cartridge replacements.  They are expensive!  I hate paying more for ink cartridges then I do for car insurance.

But what can you do?  They’ve got us over a barrel don’t they?  We need the printing done and they have the ink.  Here’s what I found to beat them at their own game.

Next time you need to do a print job, before hitting PRINT, go to the OFFICE BUTTON in the upper left hand corner and click on it.  {Sorry Apple folks I use Microsoft…you’ll need to check out if this will work for you too.}  Then click on the PRINT icon in the bar on the left.  You should now have a window with print commands.  Click on the PROPERTIES button (Mine is in the upper right corner.)  This takes you to a list of  “printing shortcuts.”  Click on the dropdown menu for printing quality. You now have several choices: Fast Draft – Fast Normal – Normal – Best – Maximum dpi.

Here’s where you have to make a decision.  What kind of printing job do you need?  Is it to be handed out to others or printed for a signature?  Thus requiring a high quality.  Or is it something you’re just going to file or toss in the trash shortly?

We all have different needs.  They all don’t need the highest quality.  So experiment a bit.  I find most of my printing jobs can be done using the Fast Draft mode.  I see only a little quality lost and uses a LOT less ink.  Fast Normal for things I want to keep.  Please note:  If your page has color or colored links you want to be readable, use Fast Normal or Normal.  Now if it’s something you want to hand out and impress, you need the highest quality,  use Normal (The default setting.)

So now click on your chosen quality.  Then click OK.  This brings you back to the printing window.  Click OK.  Your print job is printed.  Note: The change to Fast Draft or Fast Normal is not permanent.  You need to reset it when you change print jobs.

You may say “That’s too many steps; it will take too much time.”  Just do a page in Fast Draft.  You’ll see the printing is a LOT faster.  I’ve found that after using this technique several times, the time lost in clicking several buttons is more than offset by the increased printing speed.

I have seen a cost savings of at least 37% by using this simple technique.  Now that adds up.  Experiment with this.  Have some fun.  Find out what works for you.

As a Financial Planner…I’d say that’s good Financial Planning.

P.S. I’ve lost my preferred parking at Sam’s Club.

“If common sense is so common…why is there so little of it?”

October 5, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

“8th Wonder of the World.”

Albert Einstein called it the “8th Wonder of the World.”  Those that earn it agree, those that pay it…despise it.

It’s called COMPOUND INTEREST.

I’ll bet that most everyone has heard of it.  But do folks understand it?  How can something (other than politicians) earn both a Love and Hate status?  As the first paragraph suggests…If you earn it – you Love it.  If you pay it you Hate it.  One helps you grow and one helps you decrease.

OK.  For those who don’t remember how this works, here is a refresher course for you.  Remember, I’m just trying to show the principle.  Dollar amounts are kept round and simple to help explain the concept.

Let’s say you have $100.00.  You put it in the bank and earn 5% (Those were the days!).  At the end of the year you earn $5.00 or 5%.  You now start the new year with $105.00. You still are earning 5% so in year 2 you’ll earn $5.25.  The new total is $110.25.

Let’s look at this.  That’s a $10.25 increase or 10.25% in two years (5.125% average per year).

Now the third year.  We start  with $110.25, still @ 5% per year.  We earn $5.51 for year 3.  Our new total —$115.76 or an increase in total value, starting from $100 to $115.76 is 15.76%, (15.76%  3 = 5.25 % per year).

“Wait just a minute!  The bank said they would give me 5% per year.  They never told me they had raised that.”  They didn’t raise anything (bless their hearts!).  So where did the extra .25% come from, if they didn’t increase the return?

It came from the interest earned on the $15.76 that was “Reinvested” in the account  – COMPOUND INTEREST!

Or put in other words…NUMBERS.

Year 1 @ 5% =  $5.00                  Each year the account earns more money

Year 2 @ 5% =  $5.25                                            AND

Year 3 @ 5% =  $5.51                  The rate of increase gets bigger each year.

“So we have that great new bit of knowledge under our belts.  So what does that mean and how can I use it?”

Imagine you are 25 years old (big stretch for me, I’m 63…LOL).  That $100 of yours, over 40 years (you’re now age 65) @5% would be worth $704.  Over 700% more than you started with!

That’s an average annual return of 15.1% per year.

“I’m only getting 5% a year.  How can I be getting 15.1% per year?”   For you math and engineering types:

Ending Value ……….$704

Starting Value………   100

Total Increase            $604 40 yrs = 15.1 = 15.1%

Now that’s just $100 set down one time.  What about $100 a month @5% a year for 40 years? (That’s $48,000 put in).

You would have $154,205 after 40 years.

But what if you waited a year to start and used that $1,200 to say…take a cruise.  WOW!…Great Idea!! (Just you, $1,200 won’t pay for two…). You would then have —-$145,473 after 39 years…..$8,732 LESS.

That cruise cost you $8,732 and not $1,200. By the way!  How’s them cruise pictures lookin’ after 40 years?

This principle works EXACTLY the same way when you PAY interest…just in the other direction – Remember the cruise?

Fail to learn and understand this principle at your own peril!

“If common sense is so common…why is there so little of it?”

October 2, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

Reuse Your Printer Paper – Save Money – Save a Tree

The cost of printer paper has gone through the roof.  Not just the financial cost but a great ecological cost.  I’ve found a simple, easy way to save money and the environment.

Reuse your printer paper.  What?  Of course you can’t always reuse your printer paper for every new print job you have.  But you can reuse it, more than you think.  Here are some ideas I’ve used to cut down (No pun intended) on the cost of my printer paper and help the environment.

Above my desk I have two trays.  In one I put a supply of fresh, unused printer paper.  In the other I place used paper.  You know, those sheets that only have just one short line of (meaningless) printing left over from printing of a web page.  Or those pages you’ve decided aren’t printed well or have mistakes on them (Well at least I have some of those.)  These are the pages you have put in the trash before, gone, wasted.

The page has two sides.  I take that sheet before throwing it away and look at it.  Is there a clean side I could use later?  If there is, I put it in the tray of used paper.  I sometimes will take a pencil and quickly draw a curved live across the used side to remind me it’s a used paper (this only takes a second.)  This prevents the sheet being used on something I want, that uses only one side.  You don’t have to do that, but it has saved a few mistakes and thus…lost time.

I use the tray of used paper for: Scratch paper, printing something I am only going to use quick and then throw away or file (Why waste a clean sheet?), as a divider or sorter, taping up a large note as a reminder, packing material, virtually anything you would use a clean sheet of paper for, but don’t want to waste a new sheet of paper.

Imagine the cost savings.  Imagine what reusing your paper will do to reduce the number of trees that are cut down each year.  Imagine how you will feel knowing you are doing both.

“If common sense is so common…why is there so little of it”

G. Herbert

 

October 1, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

“What Is The Difference Between 5 & 6?”

Over the many years as I’ve taught financial planning seminars, I’ve asked this question…What is the difference between 5 & 6?  Most just smiled and looked at me like “Who do you think I am…some dumb guy?”  You think you know the difference between 5 & 6…but do you?  Knowing the difference can mean financial success or failure for you.

 OK…what IS the difference between 5 & 6?  “One (1) of course”, you say.  You’re not alone; most everyone answers that way.  Here is where I start to teach my clients how to act in their own best interest, how to become a wise financial planner for themselves.

I teach them to first ask…”5 & 6 what?”  If you are just talking about numbers then you are correct in saying “1”.  What about the difference between 5 & 6 percent (%)?  Sure that’s a 1% difference too…or is it?

If you’re talking to your friend over the back fence, about the rate of return you are getting on your CD then the difference is 1 percentage point…but it’s also 20% more return (or money in your hand).

What?  Let’s look at it this way.  I’ll hold up my hand, I have five (5) fingers up.  Now you hold up one (1) finger (be nice here).  We have six (6) fingers in total, correct?  YES.  OK put your hand down.  I look at my five (5) fingers and count out each one by percentage.  Twenty…Forty…Sixty…Eighty…One Hundred.  Each finger is worth Twenty %, right?  YES.

OK now, put your one (1) finger up again.  I have five (5) fingers held up and you have one (1) up for a total of 6 fingers. The difference between you, with 1 finger and me, with 5 fingers is 1 finger (Rate of Return).  But can’t we also say we have 20% more fingers (RETURN), than just me holding up my five? Sure.

Why does this matter?  Here’s where you get closer to Financial Freedom.  Let’s say you have a chance to put your money in something (doesn’t matter what) at say 5% with very little risk.  You also have a choice of something else at 6% with a little more risk.  Which do you pick?  Normally, most people say…”For only 1% more why take the risk?”  But is that really the question you should be asking yourself?

How about…”For the extra risk, is it worth the 20% more money I’ll earn?”

Now it may NOT be worth the extra risk to get that extra money.  But maybe it is!  Do you miss that extra 20% because you asked yourself the wrong question?  Over the years this “little” 20% ads up big-time.  Would you like your 401 (k) or CD’s to be 20% larger?  Dumb question…sorry.

It works in BOTH directions.  You have a choice of paying 5% or 6% on something and you say,  “Ahh… for only one percent more I can use the bank where my friend works.”  That better be your BEST friend because you are going to pay 20% more money (plus compounding) to do that.  Is it worth it?  Maybe so…maybe not.  But ask the right question when you are deciding.

Knowing the difference between 5 & 6 can mean the difference of Financial Freedom or Financial Disaster.

“If common sense is so common…why is there so little of it?”

September 29, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

“There Is Not Enough Money!”

In over 30 years of practice I’ve heard that one too many times.

First off, it’s not true. There is only so much money out there at any given time. OK, not counting the government printing more and more to “Stimulate” the economy (That’s food for another article).

But my 401 (k) is half of what is was and my CDs aren’t much better. That is most likely true. However that still changes nothing in the amount of money in circulation. It’s still out there. It didn’t disappear!

My big point is not that there is a certain amount of money out there but this… Over our lifetimes we take in enormous amounts of money. Example: If you were 21 years old and only made $24,000 a year ($2,000 a month) and NEVER had a pay raise over your working lifetime of 46 years you would have had $1,104,000 come through your fingers. Yes! Over a million dollars!

Yes, you’d have had to pay taxes, insurance and a, lot of other things, plus inflation would have eaten a BIG hole in that figure, but it’s STILL over a million dollars.

Average $40,000 a year ($3,333 a month) that would be $1,840,000… almost 2 Million dollars! What about a combined family income of say $90,000 that’s- $4,140,000 – OH YEAH! Can you see what I’m getting at?

We all will see a great deal of money in our life times (By the way the figures above do NOT include Social Security or other retirement income we may have – (I feel another blog post coming on) in our retirement years. A very wise person once told me…”A person does not get rich Making money, But by Managing the money he makes.”

Do you get that? It’s not the amount of money, we’ve all seen people with lots of income have nothing at retirement and then those that made a small income, comfortable in their later years. If you were in India (not a backwards country) your annual average income of $1,068 (Wikipedia 9/09) would give you only $ 49,128. Now even with their economy doubling that figure every 10 years, there’s still no comparison.

Our education system has done a pretty good job of teaching us HOW to make a good bit of money but has done NOTHING on teaching us HOW to manage it.

If they won’t teach us… we have to learn it ourselves.

“If common sense is so common… why is there so little of it?”

September 27, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

Financial Freedom

First of all, to me, financial freedom is… not to be dependent upon someone else, your family nor the government to support you; you are free to do as you wish, when you want to do it, with whom you wish to do it. Financial freedom does not need to mean filthy rich. Let’s get that straight, right from the start.

I have known many people that were not considered RICH, but had the ability to travel, spend time with family, volunteer and anything else they really wanted to do. The purpose of these RANTINGS is to share the “Secrets” of gaining Financial Freedom.

The easy part and the hard part in doing this is that there are NO “Secrets.” The techniques and methods to get there have been known for thousands of years. You say…”If this is so, why don’t I know them?” It’s probably not your fault. Our education system has failed miserably in teaching us HOW to take care of the fortune we will make in our working years.

The first thing you must learn is to IMAGINE or BELIEVE that it is possible. Look at those that are Financially Free today. Most did not start out with a silver spoon in their mouth. They first Imagined it possible, then went out and found out how to do it. These and future rantings will attempt to teach you these common sense “Secrets”. I’m here to spread some common sense around.

A very wise man asks…
“If common sense is so common…why is there so little of it?”

September 24, 2012 I Written By

Herbert has 30+ years of experience helping people with their money. Which makes him uniquely qualified to counsel individuals and families on financial planning.

Bank Bonus Database

iBankBonus has compiled a list of bank bonuses. The list is particularly helpful, because you can view bonuses available by state, as well as see a brief overview of the terms of the bonus. I tend to sort by bank bonus value.

Some terms include:

  • Initiate ACH transfers
  • Set up recurring payments
  • Set up direct deposit
  • Complete forex transactions
  • Account minimums

Just remember to take screen shots of all the confirmation pages, and offer pages so the banks don’t make a ‘mistake’ crediting your account with these bonuses.

August 26, 2010 I Written By