Thursday, July 26, 2012

Let's talk about....

Taxes! *cringe* Don't worry, I'll keep it relevant and important. As boring and intimidating as the topic is, it is worth having a basic understand. After all, the only things certain in life are death and taxes! You don't need to know how to fill out your own tax return - hello, it's called Turbo Tax. But knowing and understanding some concepts can help you keep track of your money better.

You know how when you get paid, the pay stub shows the difference between what you actually made and what you are receiving? The difference is what the government has withheld from your paycheck. They withhold your money to make sure they get paid what they are owed. It's kind of nice for you too, because if they withhold enough you don't have to shell out a bunch of cash in April.

Whenever you start a job, you are asked to fill out a W-4. This form is how the government decides how much money they will take out of each paycheck you get. The W-4 has you specify how many "personal allowances" you need. This is based on if you're married, how many kids you have, etc. The theory is that when you have a spouse/kids you get a tax break and don't pay as much in taxes, therefore the government will withhold less from your paycheck. So, remember, the higher the number of allowances you take, the less money they will take out. If you don't take any allowance, BAM, they will take as much as they can.

Now, of course, if they take out too much money it gets returned to you. How many times do we get a huge tax return because they took more money from our paycheck than we actually owed? Maybe you like getting a tax return, it's kind of fun, like a little present. But remember - that money is your money. You just loaned the government your money for free. Here Washington, just hold on to my money for a few months. Nah, don't pay me any interest on it, you can just hold it, thanks! Once they withhold it from your paycheck, you can't get it back until the year ends and you file your tax return. I don't know about you guys, but I have my own uses for my money.

For a lot of us, we don't even make enough money to owe taxes, so the government shouldn't be taking anything out. How do we make sure they don't withhold anything? By marking exempt on your W-4! They will still take out your social security taxes, those are unavoidable. But you will get to keep everything rather than having to wait a year to get it back!

How do you know if you will make enough money to pay taxes? There is a hurdle you have to pass before you will owe any taxes. This hurdle comes from the deductions the government allows you to take in calculating how much you owe in taxes. The first is the standard or itemized deduction. If you want to know more about the itemized deduction, ask and I'll explain, but it doesn't apply to most of us. The amount of your standard deduction depends on if you're single or married. Check out this sweet chart:

Filing status
YearSingleMarried Filing JointlyMarried Filing SeparatelyHead of householdQualifying Surviving Spouse
Then, if you are not being claimed as a dependent by someone else, you get what they call a personal exemption. For each member of your family; you get to deduct a certain amount. For 2012, that amount is $3,800.

You automatically get to deduct these amounts from your income, so if your deduction and exemptions are more than your income you won't owe any taxes.

So for Greg and I: we get a standard deduction of $11,900 and then two personal exemptions, or $3,800*2=$7,600. To owe any taxes, we would to earn more than $19,500 this year.

For a single person who is claimed as a dependent by their parents: you get the standard deduction of $5,950  but no personal exemption. You have to earn more than $5,950 this year to owe any taxes.

A single person who is not a dependent: you get the standard deduction of $5,950 and one personal exemption of $3,800. To owe any taxes, you need to earn $9,750

If you know you're not going to owe any taxes, don't give the government your money. I mean, unless you just really want to.

Monday, July 2, 2012

What do I do with all this money?

Once you've decided that saving money is important to you and you've committed to disciplining your spending, your money will start to accumulate. It doesn't matter how slow this process is, as long as it is happening. Shoot to save 10-20% of your income. Now that you are saving money, what should you do with it?

The first thing you should do with your savings is build up an emergency fund. The size of this fund will vary based on your life situation. Most experts recommend 3-6 months of income, but if your family involves children and a non-working spouse you might want to consider saving more. This money is only for emergencies! Emergencies include covering your living expenses if you lose your job, fixing the car, doctor's bills, etc.

Some people ask, "Shouldn't we pay down our debt first?" This is a very good question, especially since we all know how dangerous debt can be. The reason it is good to start your emergency fund before you worry about putting all  your savings toward paying off debt is this: if you don't have an emergency fund and an emergency happens, how will you pay for it? With debt. By not setting aside an emergency fund, you run the very real risk of going into more debt in the case of an emergency. This amount of debt is usually going to be more than the interest you will accrue by waiting to pay off your debt.

Where should you keep your emergency fund? Traditional bank savings/checking accounts don't earn very much interest, but they are very safe and your money is easily accessible. You don't have to worry about an investment tanking and losing your money, and when you need the money you can get it very quickly. Some internet banks offer higher interest rates than Wells Fargo/BoA. Credit Unions also offer higher interest rates and better service. Make sure your bank is FDIC insured. You might want to keep some cash at home just in case you need immediate access, but keep in mind that no one is insuring the money under your mattress and it is earning zero return. Your emergency money should NOT be invested in the stock market or in long-term bonds.

The second thing you should do with the money you are making is pay off any credit card debt and consumer loans. Consumer loans are taken out to buy things such as TVs, washers and dryers, furniture, etc. While you are in debt for these items, your hard earned money is being put to use paying down interest. This isn't benefiting you at all, it isn't helping you accomplish your goals. Once you get out of debt, all of your savings will be able to go towards your goals rather than towards interest. That is a beautiful thing.

Once you are out of debt and have an emergency fund, it's time to have fun and really invest your money!