Monday, August 29, 2011

Financial Wish List

I have saved the remaining $2,000 for my Roth IRA contribution and I'm anxiously awaiting the September 1st withdrawal so my IRA investments for 2011 will be officially done. I also have saved enough for the carpet cleaning bill that we put on our credit card. So now I think I'm finally ready to save money again. The only problem is I don't know what to save for first. I have so many things I want to save for, but my income is not big enough to do them all, or at least do them all as fast as I would like. I'm a little stuck on which one to do first. In Dave Ramsey's baby steps, he says to go smallest to largest, but when saving, it's tougher to decide which thing to save for first since some are more important than others or we may need the money sooner. Here are the things I want to save for and how much each would cost:

New carpet for our basement: $3,000
It makes me so mad that we just replaced this carpet less than a year ago, and now we have to do it again. It's livable with the carpet and pad removed in part of the basement, but it would really be nice to not be embarrassed about our ugly basement.

New used vehicle or 2: $16,000 to $32,000
We have 2 vehicles with over 100,000 miles on them, so unfortunately we'll need to be replacing one or both of them some time in the next few years. I hope it's not next year, but am determined not to go into debt to get a new car, so I want to have enough money to pay for it in cash. Unfortunately one of them could die suddenly and we'll need to replace it fast, so the sooner I have the money for a replacement, the better. I came up with a replacement cost of $16,000 each because that's what a two year old version of the same make and model as we have now would cost. This is just a number I picked, so we could maybe get a slightly older car that is not as expensive.

2012 IRA Contribution: $5,000
I'm not even officially done with this year's yet but, since I am behind on my retirement savings for my age, I need to make this a non-negotiable investment next year.

Trip to Japan: $10,000
I know it's extravagant, but it's still on the wish list. We had the money set aside this year and reservations booked. But, after the earthquake there this spring, we cancelled the trip and I ended up putting that money towards paying off our second mortgage.

One disappointing thing is only the IRA contribution will really contribute positively towards our net worth. I guess technically a new vehicle is an asset, but in 6 or 7 years it'll be worth no more than the cars we currently have. We are currently about $2,000 under water on our house too, so I'm tempted to put some extra money toward the mortgage to improve our overall net worth. Another thing I should mention is I was thinking we'd need to increase our emergency fund. We currently have 1 months of expenses plus a $1,000 rainy day account for smaller "emergencies" such as a car repair etc. Because I plan on saving the cash before we actually purchase the items listed above, the cash I'm saving could double as more emergency funds if there was a true emergency. So, for right now I plan on just keeping the EF at $1,000 plus one month's expenses.

What do you think? What would you save for first if you were in my situation?

Monday, August 22, 2011

Could you be charged penalties and interest by the IRS even if you file by April 15?

I've found out that no good deed goes unpunished. Besides fully funding my Roth IRA (as of September 1), I have done two other significant things this year to improve our finances. One is paying off our second mortgage and the other is making some extra money outside of my regular job. Although they will both benefit us, the tax consequences make the benefits smaller. Because I paid off that second mortgage, we won't be able to deduct as much interest and the self-employment money does not have taxes taken out when I receive the money, but I'll owe close to 50% in taxes on that money when we file our tax return.

I have never been one to really pay close attention to tax law before. Every year since I started working I have received a refund when I filed my tax return. My assumption was that if I ever got to a point where I under paid my taxes on any given year, I'd just have to send them a check for the difference and be done with it. I didn't realize if you owe the IRS more than $1,000 that not only do you owe that money, but you will also have to by penalties and interest because you under withheld or didn't pay estimated taxes throughout the year.

I was doing some more research on paying more taxes on my Adsense and Amazon affiliate income as I earn it so I won't have a huge tax bill at the end of the year. If I'm in debt to anyone I want to get rid of that debt ASAP. Anyway, unfortunately it looks like they don't offer the option of paying the taxes as you go. However, it was suggested you pay quarterly estimated taxes on that money. While doing my research, I found that not only is paying some of that tax by submitting quarterly estimated taxes as I go along a good idea, it might actually be required. Since I don't make a lot of money on those 2 things yet, I think there is a way to avoid filing estimated taxes and the hassle of trying to figure out that paperwork (which I dread almost as much as sending them money... I hate confusing paperwork!). Please correct me if I'm wrong about this, but from what I understand, it's only an issue if your self-employment causes you to owe $1,000 or more when you file your taxes for the year (that's just considering your Federal return).  After crunching some numbers and guessing how much I'll make in the last 4 months of 2011, I determined that it is likely we will owe over $1,000 in federal income tax. But, from what I understand, the "loophole" to not have to deal with quarterly estimated taxes is to have extra money withheld from my regular job's wages so that the taxes owed at the end of the year will be less than $1,000. The sad thing is I changed my withholding just a couple weeks ago. Now I have to ask to change my W4 again and have even more taxes withheld.  Because I hate being in debt to anyone and don't want to risk getting too close to that $1,000 I think I'm going to have them withhold all the taxes that I think will be due for the whole year.  Since I already know we'll owe the state too, I will also set it up to withhold extra for them as well. The really disappointing thing is it is going to decrease my paychecks by almost $100 every week for the rest of 2011!  I thought the government was already getting enough of our money! But, on the bright side I at least caught this now and I have 4 months to fix it.  It's just going to be a bummer seeing small checks for the rest of the year once I update my W4.

Saturday, August 20, 2011

Ouch! Will I have to pay 48.3% in tax on my Adsense and Amazon income?

As I mentioned in my last post, I decided to change the withholding on my paychecks so I spread some of my tax burden throughout the year.  I thought maybe I should look into getting taxes withheld from my side income.  While doing that research, I discovered some more bad news.  If you make more than $400 from "self-employment" such as Adsense or Amazon, you not only have to pay your tax rate, but you also have to pay an additional 15.3% for Social Security and Medicare because they consider this self-employment. I had thought if I set aside 25% of any income I made I should have my taxes covered. Then I also remembered that there has not been any state taxes withheld either, and that tax rate is 8%. So I added up all these taxes and came up with 48.3%...

Federal tax: 25%
State tax: 8%
Self employment tax: 15.3%
Total: 48.3%

I know tax brackets are set up that you pay 10% on your first $17,000 (for married filing jointly) and 15% on income up to $69,000 and then 25% is the rest.  So I don't know if they consider extra income the first part of your income or the last.  But, I'm assuming because there was no taxes taken out at all, then it would get taxed at the highest rate which in our case is 25%.  The state tax is set up in a similar way - you pay a smaller percentage on your income to a certain point. So maybe it won't be 48.3%, but I'm worried it really could be this bad.  It kind of makes me think it's not worth it if almost half of the extra money I make has to be given back in the form of taxes.

Do any other bloggers who make money from their blogs know the answer to this?

Thursday, August 18, 2011

Are you faced with a big tax bill next April?

Now that we are not paying as much in mortgage interest we will not be able to deduct as much interest on our taxes. I'm also making some extra income that I'm not currently withholding tax on, so I'm getting concerned about just how bad our tax bill will be.  I decided to spread some of that pain out and change my tax allowances on my income from my full time job.  I admit, I don't know a lot of about taxes, so when I filled out my W4 when I first started my job, I didn't know if a higher the number meant more or less taxes are taken out.  After some research I found out that the higher the number, the less tax they will take out of your paycheck.  Mine was set at "1", which was fine for last year, but this year they are not taking enough out. So, I just had it changed to "0" so more taxes will be taken out of my paychecks, but we won't have to pay as much when we file next year.  I just got my first paycheck since this change and it was $12.99 less than normal.  So with about 19 weeks left of the year, our tax burden should be $246.81 less.

So, if you think you're going to be paying in next spring, talk to your employer about changing your W4 and change your allowances to a lower number.  If you get a huge refund every year, and want some extra cash before the holidays, then a way to get more money now is to change your allowances to a higher number.

Tuesday, August 16, 2011

Net Worth Update - August 2011

Here is a look at my net worth this month:

Approximate value of house*: $182,000 (Down 1,600)
Roth IRA: $19,295 (Down $815, but invested $1,600 since last month, so more like down $2,415)
Simple IRA: $4,759 (June 30 statement - it's probably a lot lower now...)
Savings: $6,078 (not including money set aside for property taxes)

Mortgage: $183,482

Total net worth: $28,650
Difference from last month: -$2,123

*Value from so probably not 100% accurate.

So as expected, the stock market hurt my net worth this month. Hopefully it will bounce back next month (after I make my investments of course!).  I don't want to dwell on all the money lost and the fact that our house value is at an all-time low, so I guess I'll just post this and hope for better numbers next month.

Wednesday, August 10, 2011

Now what do I do?

My original plan was to fully fund my Roth IRA by October 1st, but being anixious to accomplish my goals even faster, I was starting to think I could even have it fully funded by September 1st. I really never gave much thought to how the markets were going to be doing at that time. But, current events have changed that. I've contributed $3,000 so far this year, and have lost almost all of it already. I'm trying to decide if I should add the remaining $2,000 on September 1st.  Obviously, I want to buy when the market is at its lowest, but I just don't know when that will be.  Will the stock market bottom out soon? I'd hate to put my remaining $2,000 in on September 1st and then the markets are even lower later this year and I've already fully funded the IRA for the year. But, I also really want to accomplish my goal of fully funding my IRA ASAP. I wish I knew how much more the stock market was going to drop and what date it will bottom out. What do you think?

Sunday, August 7, 2011

How to have a positive mindset when it comes to money

I have a couple friends on Facebook who sometimes annoy me because they are always complaining! One of the friends is always posting updates about how she will never find a man or how miserable she is because she doesn't have a boyfriend.  A couple others will gripe about anything and everything. So I know how annoying it can be to see someone always complain about things. 

And I see it in myself when I read this blog. My last post is the perfect example of my excessive complaining. Probably half the posts are about how this and that has negatively influences our finances.  I have to admit, this has been a particularly tough year with the unexpected and uncontrollable expenses.  The rapid depreciation of our assets like our home and retirement accounts does not help either.  However, to look on the positive side, it's projected that we will make more this year than we ever have in previous years. We have also accomplished some financial goals like paying off a small mortgage which will help us save a bit every month and that will potentially help us build wealth in the future.

So I started thinking of how can I look at our finances in a more positive way?

Since I'm a glass is half empty type of person, I had to do some research on this.  Here are some ideas:

Be thankful whenever money comes to you. 
So whenever you get your paycheck, you get a rebate, earn a couple bucks of interest on your savings account, or even find a penny on the ground, take a moment to acknowledge it and feel gratitude for it.

Imagine what it would be like to be wealthy. 
Take 20 minutes of time without interruptions and imagine the house you would like to live in, or the car you would like to drive, what kind of vacation you would like to take.  You can imagine yourself checking your bank accounts - how much money is in there?  Allow yourself to feel as if these images are reality.

Create a vision board. 
I know that is stolen from "The Secret" and a little bit cliché.  But it may help you with the above suggestion of imagining what life would be like if you had abundance.

I admit I struggle with this one. Don't get me wrong, I would love to give.  But, at this time I think, "I'll give to charity once we have a better control on our finances". However I have read time and time again how money flows back to you when you give.  So give giving a try!

Think wealthy thoughts.  
Say affirmations like "money comes to me easily" or "my net worth is always increasing" or "I always earn more money than what I spend". However, stay away from affirmations that are so much of a stretch that you won't believe them.

Read success stories.
Read the "rags to riches" stories out there.  Often you'll find people that started off in a worse position than you and were able to become wealthy.  Learning their stories can give you confidence that you can do it too.

Positive Wealth and Money Links:

What Is The Right Attitude Towards Money?

How to Develop a Positive Money Mindset

Affirmations for Attracting Money

Positive Personal Finance

Top 10 Rags to Riches Stories

Thursday, August 4, 2011

Don't Look

When I heard about the stock market having it's worst day in three years, I knew I shouldn't look my IRA balance. I kept telling myself don't look because this is money I don't plan on touching for at least 30 years. But, I couldn't resist and prepared myself for disappointment. Here are the results.

Just 2 days ago is was $1,437.34 more. That is nearly all the money ($1,600) I JUST put in three days ago. I wish I would have invested today and got the better mutual fund prices.

I just can't seem to win when it comes to money.  Speaking of bad news - I found out yesterday that our insurance won't cover out sump pump incident, so I don't know how bad that is going to hurt us. Apparently if your sump pump malfunctions and overflows from the sump pump basin they'll cover it, but if the sump pump malfunctions and doesn't do it's job - i.e. get rid of excess water under our house, then they don't cover that water damage. Stupid technicalities!

Tuesday, August 2, 2011

IRA Asset Allocation and Balance: August

It's time once again for a report on my Roth IRA balance and asset allocation. Stock values have decreased a bit over the last couple weeks, so my account was back below $20K for the last couple weeks, but after my contribution this month it is currently at $20,954.97. Even though I added $1,600, it is only up $813.55 since last month.

I only contributed $1,600 instead of the $1,800 I had planned because life got in the way again. Last Monday was a pretty bad day. It started off with my husband finding out his uncle died and then the end of the day us having to call our insurance company because our sump pump stopped working and we had enough water in our basement to ruin the carpet and pad we just bought last November. Between that and the problems we had with the cats I guess it just wasn't meant to be for us to have nice carpet. If only we would have just waited a year to replace the old carpet. I wouldn't be as bummed out if it ruined the carpet we had wanted to replace anyway.

So getting back to the IRA. A new sump pump cost $200, so I decreased my contribution by $200 at the last minute in order to pay for that. Unfortunately the expenses are not done. We have a $1,000 deductible on our insurance policy, so we'll probably have to spend another $800 out of pocket. So at this time, I don't know if I'll be able to finish my IRA contributions by September 1st or not. I'll need to put in $2,000 to do so, and I don't know if that will happen. Hopefully we can cover the carpet cleaning/pad replacement out of my husband's income, but I doubt it.