Free Money Finance

Retiring Early and Maximizing Your Career

Here are a couple posts worth re-visiting from one year ago today:

• How to Retire Early - Want to call it quits early?

• Maximizing Your Greatest Asset: Why Your Career is So Important - There's big, big money in your career.

Best of Free Money Finance: Maximizing Your Greatest Asset: Why Your Career is So Important

I think Maximizing Your Greatest Asset: Why Your Career is So Important is one of my best posts ever because it highlights the enormous impact your career can have on your personal finances. Using simple calculations, I show how maximizing your career income can mean millions and millions of dollars to you throughout a career -- much more than if you simply put it on auto-pilot and hope for the best. It's one of the top few fundamental issues that can make a gigantic impact on whether you're rich or just barely getting by.

Posts of the Week -- March 30

Here is a list of my favorite posts this week:

• Is Overtime Pay Worth Being Away From Family?

• Details on How I Paid My Mortgage Off Early

• More Thoughts on Asking for a Raise

• The One Idea That Could Save You Millions of Dollars

• You Need A Budget Pro Now Imports Files from Banks

And be sure to vote in the March Madness championship round.

If you're a regular reader of Free Money Finance and enjoy the content here, would you do me a favor and tell three (or four) friends? I sure would appreciate it! And if you're not a regular reader, what are you waiting for? You can subscribe easily to Free Money Finance by using this link.

Have a great weekend!
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Writing a Will and Saving Money

Here are a couple posts worth re-visiting from one year ago today:

• How to Write a Good Will - Consider this my every-so-often reminder that we all need updated wills.

• Comments: Save Big Money by Using Generic/Store Brands - Lively discussion on branded products versus generics.

$1 Million Isn't What It Used To Be, But It's More Than Most People Have

One of the comments I receive most when I post on "how to become a millionaire" or something similar is "$1 million isn't what it used to be." No kidding. Nothing is what it used to be -- it's called inflation.

That said, I usually respond that while $1 million isn't what it used to be, it sure is more than what most people have. That argument seems to work in most cases. ;-)

Here's a piece from MSNBC titled, appropriately enough "$1 million is just not what it used to be." Some highlights:

Not that long ago, the word “millionaire” conjured up visions of chauffeured limousines and extravagant shopping trips and elegant yachts. These days, a millionaire is more likely to be the guy or gal next door who saved carefully — and perhaps benefited from the sharp run-up in housing prices — but still worries about covering the exploding costs of children’s educations, caring for aging parents and funding their own retirements.

And the fact is, $1 million doesn’t go as far these days as it used to. For one thing, it’s vulnerable to inflation — someone who bought $1 million worth of goods in 1957 would need $7.3 million to buy the same goods today, according to Federal Reserve figures.

It’s also vulnerable to longevity. Americans are living much longer than they used to, and that means they need larger nest eggs to get them through retirement.

Ok, so there's the ammunition for those who say "$1 million isn't what it used to be." You're right. It isn't.

But I'm right too. While $1 million isn't what it used to be, it's much more than what most people have:

But David Bach, author of “The Automatic Millionaire” and other financial advice books, points out that “99 percent of Americans don’t have a million dollars — and to them, a million dollars is a fortune.” To the hundreds of millions of people around the world who live on $1 a day or less, “it’s unfathomable.”

Yes, much, much more:

“Take a baby boomer who has less than $50,000 in savings — which is what the average baby boomer has — and tell them they need $1 million, you might as well give them a gun and tell them to shoot themselves,” Bach said.

The average baby boomer has $50,000? Yikes!

So while $1 million isn't what it used to be, it is still a good chunk of change. It certainly doesn't have the status it once did and it's far less than many people need to retire, but it's still kind of a "neat" goal for people to aspire to.

What about you? Does hitting a net worth of $1 million mean anything to you?

For those of you who just can't get enough of millionaire-ville, here are some past articles on the subject:

• How to Become a Millionaire

• Facts about Millionaires: Most Make a Bundle, Went to College, and Are Married

• Facts about Millionaires: Most Become Wealthy from Their Jobs

• Dreaming of Being a Millionaire

Save Money by Shopping with A List -- Millionaires Do (But Is This the Best Way to Save Money)

Here are some thoughts from the book The Net Worth Workout: A Powerful Program for a Lifetime of Financial Fitness (see my rating for details) on how you can save money by shopping with a list:

In fact, more than two-thirds of grocery store shoppers buy on impulse. On the other hand, if you bring a list of things you need when you go shopping, you not only spend less time in the store, you also spend less money there. In his book The Millionaire Mind, Thomas J. Stanley notes that 84 percent of millionaires shop with a list.

I certainly shop with a list -- when my wife lets me into a grocery store. Now whether or not I pay attention to that list, that's another thing. I certainly do get everything I have written down, but I also seem to pick up a bunch of other things.

Remember, a grocery store is designed to get you to buy more things than what you planned to buy originally. So just by going in to "pick up a few things," even if you have a list, you're playing right into their hand.

So shouldn't the money saving tip be something like this:

Minimize your trips to the store.

The fewer trips made to the store, the fewer opportunities you have to buy more than you need. This would argue for making one gigantic list over a week or two (or maybe more), then hitting the store for one big shopping extravaganza, not to return for a week or two more.

Does anyone do this? We try to, but it seems my wife is in the store every two or three days simply to pick up one or two things. She's usually pretty good about not buying extras, but even so, she still sometimes comes home with more than she'd planned.

Four Ways to Ruin Your Retirement

Here's a piece from Yahoo Finance that lists four ways to ruin your retirement. Their list:

1. Trust Uncle Sam.
2. Spend too much; save too little.
3. Buy high; sell low.
4. Procrastinate.

My thoughts on these:

1. I'm counting on nothing from Social Security, so I'm saving like I'm going to fund my entire retirement myself. Anything I get from the government will be gravy. But even if you're counting on something from Social Security to be a part of your retirement, I agree with their advice on the issue:

Remember that Social Security can supplement your income, but it won't pay for your retirement in and of itself -- you need to do your part.

2. Again we get back to spending less than you earn -- and making that gap as wide as possible. Do you hear a recurring theme here?

3. My solution for this: buy index funds.

4. Yes, time allows the power of compounding to work for you. So save early and save often. Even if it's a small amount, put away whatever you can now and keep adding to it. Over the course of years, it will really, really add up.

For more on retirement, see Best of Free Money Finance: Retirement Posts.

How to Make Easy Money

Like to make easy money? Me too. Here's how:

1. Adjust your federal income tax withholding so you owe no taxes at the end of the year and get no return.

2. Take the money each month ($212.33 on average -- more on this later) that would have gone to the government and put it into an interest-bearing account at 5% (you may be able to do better, but I picked 5% for ease of calculating.)

3. At the end of the year, you'll have $58.44 more than you would have otherwise.

If instead you invested that money and it returned 8%, you would have $93.51 more dollars than you would have had otherwise.

Now think about how much extra money this would be over 20, 30 or 40 years of a working career.

Ok, so these amounts aren't fortunes, but you get the idea. And why let free money pass you by.

What's spurring this suggestion from me? I recently saw that income tax refunds are averaging $2,548 so far this year. The details:

With nearly half this year's tax returns filed, the average refund is up more than $100 from last year at $2,548, Internal Revenue Service Commissioner Mark Everson said Tuesday.

Everson, in remarks prepared for a House hearing, said the tax agency had issued 50.5 million refunds out of the 60.9 million returns received as of March 10, for a total of $128.7 billion. He said the average refund was up about $125 from last year.

Why give the government an interest-free loan? Adjust your withholding and get your $58!!!! ;-)

By the way, anyone out there know of any good calculators that help people set their withholding to the correct amounts?

Star Money Articles for the Week of March 26

Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: 

• AllFinancialMatters says renting furniture is a bad idea.

• MightyBargainHunter does his own round-up.

• Five Cent Nickel compares Blockbuster Total Access vs. NetFlix.

• Blueprint for Financial Prosperity hates title insurance.

• Consumerism Commentary comments on bipolar landlords.

• Consumerist says to check your broker's background to make sure he's not a crook.

• Wealth Building Lessons gives some thoughts from The Millionaire Next Door.

• Ryan Waggoner lists 8 free things to get (and keep) your finances in order.

• Wealth Weekly has some words on income.

• Credit Card News says you should avoid paying taxes with credit cards.

Enjoy!

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Spending Your Tax Refund and Keeping Investment Costs Low

Here are a couple posts worth re-visiting from one year ago today:

• Seven Smart Ways to Spend Your Tax Refund - You'll LOVE #1. ;-)

• Low Costs Mean Higher Returns (Another Advantage of Index Funds) - By keeping investment costs low, you're helping your returns to be higher.

Will You Be Able to Work in "Retirement?"

There's lots of debate on the issue of working in retirement (which is kind of an oxymoron -- how can you be retired if you're working?) One side says that you should be able to work part time after you officially retire to help supplement your savings and extend your next egg. The other side says that while the idea is nice, you can't count on working later -- your health simply may not hold out.

Here's a piece from MarketWatch that contrasts these two views and why each of them have their valid arguments. We'll start with why people can work longer:

According to a recent Boston College Center for Retirement Research study, the bulk of older Americans should be healthy enough to work full-time until their mid-60s. The health of older workers is at least as good today as it was 40 years ago and jobs are less physically demanding than in the past. That, the study says, bodes well for Americans working longer.

And as a side note, I found this very interesting:

By the way, older workers who want to know whether they'll be among those who can keep working or not should check out their body mass index. Apparently, there's a strong correlation between being overweight and taking Social Security early, at age 62, according to a recent University of Michigan Retirement Research Center study.

Hmmmm. Not surprising.

Now, the opposite side of the argument -- but with a twist. Usually this side says you can't guarantee your health will hold out so you shouldn't plan on working in retirement. But this time they have a new angle:

More than one in four U.S. businesses has failed to plan to hire or retain older workers, according to a recent Boston College Center on Aging & Work/Workplace Flexibility study.

Consider: only four in 10 firms have adopted policies to encourage late-career workers to stay past the traditional retirement age, six in 10 employers say recruiting competent job applicants is a significant human-resource challenge and four in 10 employers say that management skills are in short supply in their firms.

This is a new one to me -- that employers won't be hiring older workers. But the piece does go on to say that many employers are in the process working on the issue and many expect that they'll develop options to hire and retain older workers.

As for me, I don't want to take the risk that I won't be able to work in retirement and as such I'm saving like a madman so I won't have to work. I would like to keep active, maybe volunteering and the like, but I don't want to have it forced upon me simply because I didn't save enough during my working career.

You Need A Budget Pro Now Imports Files from Banks

Here's part of an email I recently received from Jesse, the guy who runs You Need A Budget:

Just wanted to give you an FYI that YNAB Pro now imports downloaded files from banks. That seems to be the criteria for some people to deem a program worth their time, so I thought maybe I'd pass that on to you so you could tell your readers. I'm getting a very good response with the upgrade.

In fact, You Need A Budget (the Pro version) has a ton of recent upgrades. If you want a detailed list, click this link.

You Need A Budget is one of the three budgeting tools I use/recommend. I personally use Quicken and a homemade spreadsheet (for budgeting) since I've done so for years. But I also recommend You Need A Budget and Mvelopes Personal based on positive responses I've received about each of these from readers. To see some of these thoughts, visit these links:

• Mvelopes Seems to be a Winner (At Least for Most People)

• The Benefits of You Need a Budget

• Another Glowing Recommendation for Mvelopes

• YNAB Question of the Month: How Does it Compare to Quicken and Microsoft Money?

Does Control of Your Finances Make You Happier?

I've talked a ton about how money and happiness are/aren't related -- mainly, if there's a relationship between the two and what the extent of that relationship is. Well, here's some new light on the issue from the book The Net Worth Workout: A Powerful Program for a Lifetime of Financial Fitness (see my rating for details):

According to Money magazine, control of your finances plays a bigger role in determining how happy you are than control of your job, health, friendships, or weight.

So maybe it's not having more money that makes you happier, maybe it's having more CONTROL over your money that makes you happier.

Hmmmmm.

I'd personally say that there is some correlation between having control over your money and happiness. I've lived without control of my money and lived with control of my money, and having control is certainly better. I found it miserable having my finances out of control (though my situation wasn't drastic by any stretch of the imagination. In fact, what I call out-of-control, many people today might call in control.) ;-)

That said, I still stand by my original opinion that having more money (up to a certain point) will make people happier. After that point is reached (I'm not sure I can say what it is in monetary terms -- it may be different for every person), more money will not result in much, if any, additional happiness.

Does this make any sense to anyone or am I off my rocker? What do you think about the relationship between money and happiness?

The One Idea That Could Save You Millions of Dollars

Other than how much money your pets are costing you, the topic people hate the most here at Free Money Finance is when I suggest people consider moving to save money. And yet I keep writing about it. That's just the kind of guy I am. ;-)

But it's not me talking about it this time -- it's Liz Pulliam Weston who suggests cutting costs by moving to small-town USA. Her thoughts:

Real estate prices are stalling or even declining in some high-cost cities, but buying a home in a decent neighborhood is still just a dream for many middle-class families.

You can try stretching your finances to the bursting point or gambling on a less-desirable neighborhood. Or you can consider doing what many families have done: decamp to somewhere the cost of living makes more sense.

After all, where you live is probably the single biggest factor on your finances. A box of cereal costs pretty much the same everywhere, but a median-priced home ranges from under $100,000 in places such as upstate New York to well over $700,000 in parts of California.

The article goes on to tell the stories of several people who took this advice and thrived -- both personally as well as financially.

Liz also gives some suggestions that may help you decide whether to move and where to go including:

• Do your research
• Crunch the numbers
• Don't forget transportation costs.
• Investigate the local economy
• Consider the trade-offs
• Activities
• Culture

I've done one of these for you -- I've crunched the numbers. Not your specific numbers, mind you, but I have looked at the cost-of-living differences between several cities and it's a HUGE number. How huge? Let's just say it's several million dollars. Don't believe me? Check out Move, Save Money, Become a Multiple Millionaire -- All in One Step.

One other suggestion: if you are considering an opposite move (from a low cost-of-living city to a high cost-of-living city) at least try to use the difference in cost as justification for a higher pay range when you negotiate your new salary (you are moving with a job, aren't you?) Many employers understand that it costs more to work in one place versus another and while they probably won't make you 100% whole, you might cover a large part of the difference simply by asking for more (along with data showing the increased cost-of-living in the new city.) This worked for me a couple jobs ago and netted me an extra $5,000 or so a year as a result.

Free Money Finance Carnivals This Week

Here are the carnivals Free Money Finance is in this week and my posts that were included:

• Festival of Frugality - Pets SAVE You a Boatload of Money -- In Many Different Ways

• Carnival of Personal Finance - The Best 529 College Savings Plans

Stop by these carnivals to read some great posts!

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Updating Your Will and How to Manage Money the Right Way

Here are a couple good posts worth revisiting from one year ago:

• Protect Your Most Precious Assets - "Many parents put off writing a will because they see it as a downer -- a way to dispose of your assets after death. Think of it instead as a way to protect your most precious assets -- your children -- if something should happen to you and your spouse while the kids are minors."

• A Great Example of How to Manage Money the Right Way - Spend less than you earn, save, and invest early and often.

House Prices to Keep Falling

Well, it looks like we haven't hit the end of the housing market decline -- at least that seems to be the case for many markets across the US. Here are the details on falling real estate prices from Money magazine:

"[National] inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent," he says. "Now, with the tightening of credit, I don't see how prices don't fall another 5, 6 or 7 percent."

The tightening of credit could take as many as one million buyers out of the market, says Baker, citing Bear Stearns research. "Even if you cut that in half, say to 400,000 or 500,000, that's huge."

All that has led Zandi to alter his projection of a 3 percent decline in housing prices this year to a mid-single digit decline. The hardest hit areas, which he thinks will be Arizona, Nevada, parts of California and Florida, will absorb high single digit or even double-digit punches.

A few thoughts on this:

1. The biggest sign that housing prices are falling in my area: I got my revised assessment for real estate taxes and the listed assessment value went DOWN. It wasn't by much, but it still went down. I've NEVER had that happen before.

2. I don't necessarily believe the whole doom-and-gloom articles. It will certainly be bad in some markets -- the ones that were very hot the past few years -- but overall I think it will be just as much "flat" as "down."

3. I'm still sticking to my real estate investment plan for the downturn. Nothing to report on it yet -- I'm still looking for a good to great deal. ;-)

How to Recover Excess FICA Payments

Have you ever switched jobs in the middle of a year? If so, and if you earn a decent salary, you may have over-paid your FICA tax and have a refund due. Here are the details from Yahoo on how to recover excess FICA payments:

In 2006, Social Security was collected on your earnings up to $94,200.

If you earned this much at one job last year, you put in almost $5,840.40 that was matched by your boss. In this situation, the math is straightforward. Once your pay went over the limit, your payroll manager stopped withholding the tax and your take-home pay got a bit bigger.

But if you changed jobs and your combined income from both employers went over the limit, you probably overpaid your Social Security taxes. This is because the second company also withheld the tax, unaware of how much a previous employer had already collected.

You can get back the excess Social Security that was withheld when you file.

If you file Form 1040, line 67 of the form is where you'll get credit for your overpayments. Simply add the amounts of Social Security withholding reported by each employer on your W-2s and subtract $5,840.40. The result goes on this line, to be included in your total tax payments.

You also can claim the overpayment if you file the shorter 1040A. While it's not specifically noted on the return, the form's instructions (Page 53) tell taxpayers to enter their Social Security tax overpayments on line 43.

This has happened to me in the past. I realized it was happening and tried to get my second employer to decrease the rate of FICA payments but was told "we don't do that." (Maybe implying I was trying something illegal?) So I simply jotted it down on my tax notes, handed it to my CPA, and she took care of it at tax time.

Just another advantage of having a CPA do your taxes. ;-)

More Thoughts on Asking for a Raise

I'm a big believer in asking for a raise (under the right conditions, of course, more on that later.) Doing so is a key part of managing your career. As I always say:

Your career is your most valuable financial asset, offering you many financial benefits. You can make the most of it by getting a college degree and managing your career to its full potential. Doing this well can earn you millions of dollars in extra income throughout your lifetime.

All that said, when I ran into the Yahoo piece titled The Five Steps to Getting a Raise, I knew I had to share it with you. Here are their five steps:

1. Deserve a raise.

2. Get the facts.

3. Talk to your boss.

4. Take on a special project.

5. If all else fails...(looking outside the company for a different opportunity.)

Numbers 1 and 2 are key. In most companies, assuming you play your cards right, have a supportive boss, and the company is in a good enough position to afford it, you shouldn't have much trouble getting a raise as long as:

• You're currently doing a great job. If you're knocking the ball out of the park in several ways, a raise should be easy to snag.

• You're doing a good/fine job and are vastly underpaid for the position you hold. In this case, you should be able to at least get to "average" pay, which could be far above what you're getting now.

The stumbling block I see with many people is that they want a raise, but they simply don't deserve it. They haven't earned it and they aren't underpaid for what the market is offering. In fact, I've had marginal employees come in and ask for a raise and say (no facts to back it up) that they were underpaid. With a few quick clicks of a mouse, I was able to show them they were actually paid more than the average. Then I'd shake my head and say, "Hmmmmm. That's interesting." Usually, they immediately become tongue-tied and look for the fastest way out of my office. ;-)

Help a Reader: Should She Take a Lump Sum or Monthly Pension Payout?

Here's a comment left on my post titled Best of Free Money Finance: Retirement Posts:

I have been scanning (quickly) your topics on retirement/income and notice that most of the postings are about 401k issues. Well, I have already used that option up! I am trying to make a decision on my pension money from the company where I worked for 27 years. I am 60 and only employed part time and have many problems keeping up with things like property taxes and utilities plus I need some fairly expensive repairs done to my home and property. My options for the pension money are lump sum and monthly checks. I am really worried about what to do and have concerns that my family (a mother and a sister) will not get any of the money if something happens to me because the beneficiary rules on the plan.

Can you shed some light on this dark view?

Like with the post yesterday, I told her I'd ask my readers and they would give her some advice. What do all of you think she should do -- or at least what issues should she consider?

How Much House and Increasing Your Home's Value

Here are a couple good posts worth revisiting from one year ago:

• How Much House Can I Afford? - "This question really has two very different answers: 1) how much will a lender give you? and, more importantly, 2) how much do you feel comfortable borrowing?"

• Increase Your Home's Value -- Plant Some Trees - Landscaping can increase townhouse and condominium values by 5% to 15%.

Free Money Finance March Madness, Championship

We're now down to the final two posts left in Free Money Finance March Madness (if you wonder what's going on in these posts, see my article announcing March Madness and/or click on my March Madness category link and scroll down to read all the posts involved in this subject.) It's been a long road -- starting with almost 128 posts. And now it's only these two left to contend for the championship.

It's ironic (or maybe appropriate) that after all that voting, all the games, all the coin toss-decisions (I had several posts tied in the early rounds that were decided by a coin flip), that the top two posts ended up being written by the same person.

I've listed the final "game" below along with the wording provided by the author when the post was submitted. Be sure to comment which one you like the best to have a chance to win a free book. Here we go:

• Ten Simple Ways to Cover Your Ass(ets) - Saving and investing are only part of the equation...You also have to protect the wealth that you've managed to amass, no matter how much or little that may be.

VERSUS

• Teaching Kids the Value of a Dollar - I like this one because it's a perfect example of how easy it is to use everyday occurrences to teach kids about money. And guess what? It works!

I'll leave voting up on these until 5 pm Eastern time on Sunday, April 1. Sometime on Monday, I'll announce the champion along with the winners of the five books.

$10k Challenge: Get Your Fair Share of Back Taxes

I'm on a quest to raise an additional $10k this year in income -- extra income outside my regular job. The numbers I ran show that making this amount and socking it away year after year can yield quite a sizeable next egg.

I've already suggested ways I'm working on this $10k including the following:

• $10k Challenge: Turn in Tax Cheats

• $10k Challenge: Make $3K Turning Blood into Money

• $10k Challenge: Make Money at Auctions

• $10k Challenge: Maximize Your Investments

• $10k Challenge: Ask for a Raise

• $10k Challenge: Get Money Owed to You

• $10k Challenge: Sell Stuff You Own

• $10k Challenge: Make Money with Credit Cards

• $10k Challenge: Turn Your Hobby into an Extra Income

Here's the next idea for consideration: get your fair share of back taxes owed by the IRS.

You may be thinking that there's not a whole lot of money in this. If so, you'd be wrong. There's currently $2.2 billion owed to 1.8 million Americans for the 2003 tax year alone. Here are the details:

Apparently, three years ago 1.8 million individuals decided they had better things to do than file their 2003 tax returns, even though they were due refunds. In total, more than $2.2 billion from that tax year is still sitting in the Internal Revenue Service account.

Taxpayers can still get their old refund checks, which the IRS says could be more than $700 for some folks. But the claim, via a 2003 Form 1040, must be made by April 17. After that, the federally allowed three-year window of opportunity from the original filing deadline, which was April 2004, closes forever, and Uncle Sam gets to keep the cash.

The IRS estimates that the median refund -- meaning half of the checks will be larger and half smaller -- is $611. Some of the money is likely owed to taxpayers in every state and the District of Columbia, as well as to residents of U.S. territories and military filers who didn't file returns that year.

Ok, the median may be $611, but simple math will tell you that the average refund is $1,222. So some people are due to get REALLY BIG refunds.

Think you wouldn't qualify? Being owed a refund isn't as unusual as you might imagine:

Despite the staggering amount, the IRS says that unclaimed refund money isn't that unusual.

Each year, some people don't file a return because they don't owe taxes. But without the documentation, these folks won't get any refunds they're due. The IRS doesn't send refunds unless it gets a Form 1040, 1040A or 1040EZ that details just how big the government's check should be.

For simplicity sake, let's say you're owed $1,000 for taxes filed in 2003. And another $1,000 for 2004. And another $1,000 for 2005. That starts to add up to some serious money (30% of our annual $10k goal.) And even if you "only" get $611, it's free money, isn't it?

Here's how you get your money:

If you think some of the refund stash is yours, you can download a 2003 Form 1040 from the IRS Web site. If you need an old 1040A or 1040EZ instead, you can find them at the agency's index of past-year forms. Be sure to check out the 2004 and 2005 documents if you didn't file a return for those years either. The IRS won't send you your 2003 cash unless you filed in subsequent years.

Shocker: Many Brokers Give Bad Advice

Here's a shocker from SmartMoney magazine: many brokers offer financial advice they shouldn't give. Here's a summary of the piece:

If you walk into a brokerage and ask for financial advice, chances are the staff will offer to help with anything that's on your mind. But that doesn't mean that they're qualified to help — or that they're particularly good at it. As we recently discovered, much of the advice brokers are giving to would-be clients is off the mark. And according to some critics, some of their offers even violate SEC rules.

To find out how good brokers were at giving advice, SmartMoney sent a staff member to eight brokerages, asked them questions, recorded the answers, and then compared them to what the correct answer should have been. As you may have guessed, the results were a mixed bag -- but with a lot more bad advice that you'd expect from these name-brand brokers.

They asked three main questions: one about college savings, one on life insurance and a third on financial planning. My informal tabulation shows that Wachovia, Dreyfus, Morgan Stanley and Northwestern Mutual were the winners (two of the three correct) while Merrill Lynch and Smith Barney got all three wrong. Of course, I'm sure the results were highly dependent on the person from each of these brokerages who's answering the questions. If each had had a different person, the results could have been completely reversed.

Still, this is yet another warning to us that people who may appear to be experts in the area of financial planning may not be. They may actually be more likely to try and make your money their money (by selling you fee-based plans or investments) or simply not have the skill and knowledge to know the best answer for you. That's why it's important that you educate yourself regarding personal finances. That way you'll at least have a fighting chance to know if someone is giving you decent advice or not.

If you want to see a laundry list of bad things financial planners try to get away with, see my post titled Thoughts on Financial Advisors. Scroll down to the bottom and look at all the posts on the bad financial planners out there today. It's scary.

Help a Reader: When Should She Take Social Security Payments?

Here's a comment left on my post titled The Best Age to Start Social Security:

I am trying to decide whether or not to take Social Security in June when I turn 62, or wait until 66. I am financially secure, not wealthy, will have a PA teacher's pension, have some investments to draw on at age 70. I would like to be comfortable now and not have to wait to travel. Also, that money would pay for my health insurance. So, what to do?

I told her I would post it here and ask my readers for their thoughts. So, what do you think she should do?

Less than four hours left...

...and only one vote separates the first two posts in game #1 of my March Madness Final Four.

If you want to put in your vote for one of them, click this link.

Is It Ever a Good Idea to Pay a Credit Card Annual Fee?

Here's an article from SmartMoney that says some fee-based credit cards can be a good deal. They list the following times when it could be worth it to pay an annual fee including:

• Your annual rewards are clearly worth more than the fee.
• You end up saving, rather than spending, thanks to cardholder perks.
• You can rack up rewards, redeem — and run — before the fee kicks in.

Yes, under the right conditions, it can be worth it to pay a credit card annual fee. But for the vast majority, it's not a good deal. You can always try to ask them to waive the fee and sometimes it will work. But many times, they won't do so. Now if you're a "preferred customer" (translation: you keep a balance and pay a ton of fees in interest every year) then maybe you'll have a better shot at getting it for free.

Personally, I prefer a card with no annual fee that either makes me a ton of money or saves me a ton of money.

Your Most Important Assets and How to Spend a Raise

Here are a couple good posts worth revisiting from one year ago:

• Exercising Your Most Important Assets - Want to guess what they are?

• Six Great Ways to Spend a Raise - FYI, "spend it" is not on the list ;-)

Getting a Great Deal on Airfare

Here's a piece from Money magazine that gives some thoughts on how to get a great deal on airfare. Two of their ideas really stood out to me. They are:

• Ideally you should book your flight eight weeks out, according to SmarterTravel.com. You could pay double or even triple the fare if you wait, says Tom Parsons of Bestfares.com. If you see a good sale, jump on it. Fewer airlines are granting you vouchers if the flight goes on sale after you bought it.

• Book on Tuesday. Getting the best deal can sometimes feel like taking a shot in the dark. But the best time to buy is Tuesday evening from about 4 p.m. until midnight. That's when the airlines start to match sales and the price settles down from the weekend. If you really want to snag a last minute deal for travel within a week or two, you'll find them on Tuesday night into Wednesday morning. That's when the airlines aggressively try to fill seats.

This is something I've been thinking about since we're in the process of planning our trip to Disney. By the way, after the invasion of Normandy and sorting through the U.S. tax code , planning a trip to Disney has to be the most complicated thing in life. ;-)

Good thing I have my Unofficial Guide to Disney -- it's a great book.

Anyway, back to airfare. Anyone tried either the 8-week-out or Tuesday methods? Any good/bad results you want to share with the rest of us?

I Told You So...

I don't have much more to say on this than "I told you so."

I would say na-na-na-na-na, but that would seem childish. ;-)

You Can Make the Difference in the Final Four

Unless a miracle occurs, it looks as if one of the Final Four posts has been decided at Free Money Finance -- but the other contest -- game #1 is very close. As of this writing, only two votes separates the contenders.

To help decide who goes to the championship, go to this post and vote for your favorite!

Details on How I Paid My Mortgage Off Early

I write a lot about getting out of debt -- completely out of debt. Not just credit card debt, not just consumer debt, but all debt. As such, I have several posts on how to pay off your mortgage early since it's the single-largest debt that most people have. For a review of what I've had to say on the issue, see these posts:

• Should a Tax Deduction Keep You from Pre-Paying Your Mortgage?

• Why You Should Pay Off Your Mortgage

• When to Pay Off Your Mortgage

The other day (probably in response to one of these posts) I received an email from a reader as follows:

Why did you payoff the house early?  Were you already maxing out retirement options?  Was it possible to pay off the house in a short amount of time?  I was wondering how do you account for mortgages like mine which are $400k?  And will take quite a few years to pay off even if we focused on it?  And if we did so we'd have to forgo a maxing out IRAs and 401k.

Most of these questions are answered in the posts above (such as whether I suggest paying off the mortgage first or saving for retirement), but one thing that isn't is a detail of how I actually paid off my mortgage early. I may have covered this in an earlier post (I have so many posts, even I'm forgetting what I've written about) and the steps follow those I detailed in My Formula for Buying a House, but I thought they were worth covering just in case anyone missed them.

Here's how I responded to the email: 

I fully funded my retirement account, had an emergency fund, and so on, and still paid off my house. Here's how I did it:

1. I bought a house below what I could afford. Based on what the banks were willing to loan me, I could have had a house 2-3 times the cost of what we got. But the one we bought was nice, met our needs, was in a great neighborhood, etc. -- why did we need more?

2. We scraped together all we could to put down a good-sized downpayment. It was somewhere in the 30-35% range.

3. We lived substantially below what I earned. Thus we had great cash flow to save for retirement, fund our lifestyle, and pay off the house.

4. We put EVERYTHING extra into the house payment -- bonuses, Christmas gifts, extra income from a side business, etc.

It took us somewhere in the 7-year range to pay it off doing this.

It's that "simple." ;-)

Many people want to pay off their house early but don't want to (or can't/won't) follow steps 1-3. But they ask me how they can do it anyway. I don't think there's a way for most people to pay off their house early without at least doing a couple of these steps.

What do you think?

Is Overtime Pay Worth Being Away From Family?

Here's a very, very interesting question from CareerJournal: Is Overtime Pay Worth Being Away From Your Family?

The article details the pros and cons of accepting or declining overtime pay -- mainly, the extra income versus more time with the family. It's an interesting read and topic and I found the article to be a great insight into how one family dealt with the issue.

In this particular case, extra work was equated with extra pay. But many salaried people put in ours that are way over what would be considered overtime, and they don't get any extra pay at all. Or maybe it's simply understood that their job isn't a 40-hour-per-week one?

This all leads me to the following questions:

What is the work/life balance? When is working too much at any pay level simply too much?

A few thoughts from me:

1. Everyone will have a different answer. In my opinion, there's no "right" answer.

2. Your career is your most valuable financial asset. Any decision you make regarding it has implications (sometimes serious) for your finances.

3. That said, is anything worth more than your family? Maybe a career is worth more than an extra hour or two a week with your family, but what if it takes you away every weekend (in addition to the week?) Just where can/should people draw the line?

As I said, the answer will be different for everyone, but I'd be really interested in your thoughts on the issue. What do you do? Any suggestions for those grappling with this issue?

How to Get the Maximum Tax Deduction for a Donated Car

Here's a piece I found from USA Today that details how to get the maximum tax deduction for a donated car. The summary:

Under a provision in the law, you can deduct the fair market value of a donated vehicle if the charity fixes it up and gives it to a low-income individual or sells it to a needy person at a low cost. Only a handful of charities operate these programs, and not all used cars meet their standards.

In most cases, the charity will simply sell the car at auction, which means your deduction will be limited to the proceeds from the sale.

So here's what you want to have happen:

1. You donate the car.

2. The charity gives it away, uses it for its own purposes, or sells it for a really low price (far below fair market value.)

3. If any of these happens, you can deduct the "fair market value" which you can usually find from Kelly Blue Book. This amount will almost always be higher (and thus a better tax deduction for you) than option #2.

Option #2 is that the charity sells the vehicle (usually at below fair market value) and pockets the cash. You can then claim the amount they sold the car for.

Here are a couple examples:

• Let's say you have a car with a fair market value of $4,000. If the charity keeps the car, gives it to a needy person, or sells it to them at a really low price (let's say $500), then you get a deduction of $4,000. (By the way, I'm unclear what exactly constitutes a "low cost," so you'll want to check into those specifics ahead of time.)

• The other option is that the charity just wants the cash, so they sell it to someone for $3,200. You can claim a $3,200 deduction.

We donated two cars a few years ago under the old law -- where you could deduct the fair market value no matter what the charity did with the car. But before we donate our next car, I'll confirm with the charity that they will give it away, use it for its own purposes, or sell it for a really low price -- just to make sure I can take the full deduction.

Practical Advice from an Experienced Giver

Practical Advice from an Experienced Giver is a post I wrote one year ago and I thought many of you would like to revisit it. The article referenced here is written by a Christian man who's been a giver for over 50 years and now gives over 50 percent of his income away each year. He offers his thoughts on giving and, in particular, shares four principles for honing your giving strategy.

Why I Give Publicly Every Week at Church

In my post titled Pay Yourself Second, I said the following about paying my tithe:

FYI, yes, I could do it all at once, but as I've said, I like to give every week. It keeps me focused on the purpose of the tithe as well as serves as a witness to others that when the offering plate goes by, something should go in it.

I recently had this comment (which I'll print part of) in response to my thoughts above:

I must say, though, that I bristled when you intimated it was incumbent upon you to brandish your faithful, consistent giving as an example to others. I don't see how your logic -- unless I'm ignorant of the pertinent Bible verse's gist -- meshes with the command to "not let the left hand see what the right hand is doing."

If worship of God is supposed to be done in secret, notwithstanding our obligation to also worship corporately, why should tithing be so demonstrative? I'm confident your motives are sincere, but unseemly perceptions are not always solely the fault of the perceiver. I think tithing in secret is desirable, lest we be perceived as flaunting our piety.

This post is my response/explanation for why I give every week and in public as opposed to once a month in private.

Let's start with the verse the commenter refers to:

"Be careful not to do your 'acts of righteousness' before men, to be seen by them. If you do, you will have no reward from your Father in heaven. "So when you give to the needy, do not announce it with trumpets, as the hypocrites do in the synagogues and on the streets, to be honored by men. I tell you the truth, they have received their reward in full. But when you give to the needy, do not let your left hand know what your right hand is doing, so that your giving may be in secret. Then your Father, who sees what is done in secret, will reward you.

Matthew 6:1-4 (NIV)

A few thoughts on this passage:

1. It deals with motive. If the giver is giving simply to get recognition, that's the wrong motive.

2. If the giver gives in a showy, "look how great I am" sort of way, then that demonstrates a wrong motive as well.

3. This passage talks about giving to the needy (which would be more of an offering in my book), not necessarily giving your tithe. I recognize that there's a close connection, though, so I'd give him this one.

Now, let's compare how and why I give every week to what we've seen above:

1. I do not give to get recognition. In fact, it would be MUCH easier and convenient for me to send in a check once a month to the church and be done with it. That's what I used to do -- until I felt convicted to give every week. More on the "why" behind this below.

2. I do not give in a showy fashion. I do not wave around my check, look it over and exclaim "wow, that's a big one!" or anything of the like. I usually receive the offering bucket and put the check in with one motion -- enough that people can see that something's going in the bucket if they really want to watch me.

3. The reason I do give every week is so others might be encouraged to give as well. It's easy to sit in a church and give nothing if everyone else is putting in nothing. But if all the other members are giving something (and a person can see this), then he will start to feel like he needs to contribute as well. This is something good for the person, because as many of us know, it is certainly more blessed to give than receive.

This is why I went back to making out a check every week and putting it into the bucket versus sending in a check (or even putting it in the bucket) once a month -- so others can see that "everyone else" is giving every week and encourage them to do the same. Here's the verse I think I'm following with my weekly giving (versus my monthly giving):

And let us consider how we may spur one another on toward love and good deeds. Hebrews 10:24 (NIV)

Experience Versus Education and Saving Money

Here are a few posts from one year ago today that are worth reviewing:

• Comments: Experience versus Education - Which makes more difference in your career -- experience or education? Lots of thoughts on this subject at this post.

• Save Big Money by Using Generic/Store Brands -- Even I Didn't Know the Savings Were This Big!!! - An FMF undercover investigation. ;-) Seriously, the cost savings are HUGE!

• Money Saving Tip: Shop the Discount Racks/Bins - Big savings can be found if you just look for them!

Best of Free Money Finance: Why I Use a CPA to Do My Taxes

I think Why I Use a CPA to Do My Taxes is one of my best posts ever because it lays out the specific reasons some people should get expert tax advice. I'm usually more of a do-it-yourselfer when it comes to personal finances, but this is one area where I leave it to professionals, and this post tells why. It's often one of my most referred-to posts -- especially during tax time.

Posts of the Week -- March 23

Here is a list of my favorite posts this week:

• The Best 529 College Savings Plans

• How Much Should I Be Spending on Groceries Every Month?

• Suze Orman Knows Nothing About Investing

• What is the Most Hated Tax in America?

• The One Answer to Every Financial Question

And if you're interested in what the current status with March Madness is, click here, scroll down, and vote for your favorites.

If you're a regular reader of Free Money Finance and enjoy the content here, would you do me a favor and tell three (or four) friends? I sure would appreciate it! And if you're not a regular reader, what are you waiting for? You can subscribe easily to Free Money Finance by using this link.

Have a great weekend!
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Avoid Ruining Retirement and Making Your Brain Fitter

Here are a couple posts from one year ago today that are worth reviewing:

• How to Avoid Ruining Retirement - The Five Worst Retirement Money Mistakes - The title says it all. Five retirement mistakes to avoid.

• How to Make Your Brain Fitter in Six (Sort of) Easy Steps - I'm still not doing well on this list. ;-)

Raising Money Savvy Teens

Here's an article courtesy of Marotta Asset Management on how to teach your teens to be money savvy:

Many parents are concerned about raising their children to be financially savvy. If you want to raise kids who can create and manage wealth, there are a handful of key life skills every child should practice. Every kid should practice living within a budget before leaving home, not after. One way to provide opportunities for real world lessons at home is to give your children some oversight of the family budget.

Just as your children need opportunities in order to develop their athletic and academic abilities, they also need opportunities to develop their money management skills. Involving your children in the family finances now will set the precedents they will most likely follow as adults. While each family has to determine what level of involvement is appropriate, here are some general principles that I've found helpful in raising money-savvy teens.

First, share as much as possible about your family's finances. This is very difficult for many parents. Some fear that their children will demand more spending money once they know how much mom and dad make each month. Others are embarrassed that they can't make ends meet, even though they have a good income. Whatever the reason, more harm can come from excluding your children than from talking openly about family money matters.

Children need to see the workings of their own family's finances in order to keep from being completely foolish with their own money. Ask your children how much money they will need to have to retire at age 65 and keep their current standard of living. Most parents and children can only guess at this figure, but the answer is many millions of dollars. That's reason enough to get your kids off to a good start.

Financial decisions are also opportunities to discuss motives, which in turn instill values. A frugal father could just be mean and stingy, or he could be preparing a retirement nest egg that will take care of his wife until age 100, long after he is gone. Without knowing the motive behind his actions, children can easily assume the worst.

Even a parent's weaknesses and mistakes can be learning opportunities for their children. I have met very few people who haven't made at least one or two large financial mistakes. If you are open and honest about these mistakes, the negative example can be turned into a positive lesson for your children.

Also, if a family is having difficulty with their finances, teenage children can help. Getting the entire family to change habits and budget wisely is essential when trying to get out of debt, curb spending, or increase savings.

Finally, the best way for children of any age to get experience with finances is to give them real responsibility handling money. Children cannot learn how to be responsible with money without having a safe way of being irresponsible. I suggest that, as early as children are ready, they be given the slice of the family's budget that most directly affects them. By the time they are teenagers, they could be handling much of the money that effects their lives.

With young children, they can handle the money that is spent on games, toys and entertainment. Having to save in order to buy something that they want teaches invaluable lessons. Learning to avoid impulse buying by waiting one or two weeks before making a big purchase is one habit only learned through experience.

Another advantage of giving responsibility to your children is that it eliminates the whining and nagging for you to buy them more stuff. If your children are responsible for the game and toy budget, then they have to save up enough money to purchase that new game they want.

Parents need to be organized enough to know what amount of money is being spent in each portion of their budget in order to give their children the right amount of money. If parents help their children understand the principles of budgeting while they are young and they will be able to handle larger amounts of money when they reach their teen years.

In their teen years children can take on their own clothing budget. Many children stop wanting those expensive outfits as soon as they know that any money they save is theirs to keep and spend somewhere else.

Children can also be involved in the family's generosity. They can be included in the family conversation about what charities to contribute to and discuss what good is done by those organizations. As they are given their own money, a portion can be set aside for them to learn generosity by choosing the organizations they want to support.

By the time children are teenagers, they should have different budget categories that they spend their money on, including savings and investments. Trying to balance all of these difference categories is what budgeting is all about. By putting a given percentage of monthly "income" into each category children learn the important lesson of proportional living.

Part of being responsible includes keeping an account of where money is being spent. This is also a good discipline to learn. Whatever spending they can't account for each month could be deducted from the next month's allowance. Keeping track of their spending will give them the skills necessary to live well within their means later in life.

Here are some suggested categories, and a sample budget for teenagers:

• 15% Clothes
• 10% Entertainment (games, electronics, books, CDs)
• 5% Birthday gifts
• 10% Christmas gifts
• 7% Recreation (movies, eating out, socializing)
• 18% Educational and vocational pursuits
• 10% Big purchases
• 10% Charitable giving
• 15% Save and invest

It pays to talk with your children and offer them opportunities to practice being financially savvy. Give them a chance to fail while the consequences are not too dire, and they will grow competent to handle larger amounts as they come into adulthood.

Free Money Finance March Madness, Final Four

We're now down to the Final Four posts left in Free Money Finance March Madness (if you wonder what's going on in these posts, see my article announcing March Madness and/or click on my March Madness category link and scroll down to read all the posts involved in this subject.)

I've listed each "game" (one post versus another) in segments along with the wording provided by the author when the post was submitted. Be sure to comment which one you like the best out of each set of two as commenters have the chance to win a free book. Here we go:

GAME 1

• Ten Simple Ways to Cover Your Ass(ets) - Saving and investing are only part of the equation...You also have to protect the wealth that you've managed to amass, no matter how much or little that may be.

VERSUS

• Avoid 10 Common Debt Reduction Mistakes - If you've decided to get out of debt, that is awesome!  But, be careful.  Read this post so that you can avoid some common mistakes.

GAME 2

• Teaching Kids the Value of a Dollar - I like this one because it's a perfect example of how easy it is to use everyday occurrences to teach kids about money. And guess what? It works!

VERSUS

• The True Cost of Owning a Home - Not a true devil's advocate post, but certainly a biased look at home ownership and many of the costs that are ignored when someone says that buying a home is no brainer decision.

I'll leave voting up on these until noon Eastern time on Tuesday, March 27. Sometime on Tuesday afternoon, I'll announce the championship and allow voting to go on for a few days before announcing the champion.

Good luck to all!!!

The First Step in Taking Control of Your Expenses

Here are some thoughts from the book The Net Worth Workout: A Powerful Program for a Lifetime of Financial Fitness (see my rating for details) on the first step in taking control of your expenses:

Just as being aware of what you eat is the first step to controlling your diet, being aware of exactly what you spend is the first step to taking control of your expenses. You'd be surprised how little people actually know about their spending habits. I often hear clients say things like "I don't need much, " or, "Aside from necessities, I really don't spend at all." Then, when I question them more closely, I discover that they spend much more money than they think, and that a very large proportion of their spending is for nonessentials.

How true!

How can anyone make any sort of meaningful financial progress without a budget, spending plan or whatever you want to call it? Certainly some people do live and do "ok" without a budget, but are they really making the most of their money? I don't think so.

We've had a budget for our entire married life (15 years) and we've tracked our expenditures by Quicken for 7-10 years or so now. Doing so has helped us plan, make decisions, adjust to unexpected circumstances and control our spending. I consider having and using a budget to be one of the cornerstones to growing your net worth.

For more thoughts on budgeting, see It's Budgeting Time of the Year. It has several useful links to some of my top budgeting posts.

How to Save $2,500 in 20 Minutes

Here's a piece from David Bach that promises five ways to save $2,500 in 20 minutes. His suggestions:

• Lose the premium cable television package and save $960.
• Get real about your cell phone and save $240.
• Go wireless and save $600.
• Exercise smart and save $240.
• Shop for car insurance and save $500.

These are great ideas. I think I've covered all of them but one (#3) in one way or another. Most can be found in my mega-post titled 301 Saving Money Posts -- Hundreds of Ideas on How to Save Money. Apply a boatload of those ideas and you'll really be saving some big money.

Here's how I personally treat each of his suggestions:

1. We don't have cable at all. We get six stations off an antenna and that's good enough for us.

2. The cost of my cell phone is picked up by my employer. ;-)

3. I'm still landlocked phone-wise at home. My cell coverage just isn't 100% reliable and as clear as I want it to be. I consider my home phone more of an insurance cost than anything else. Also, I spend less than $400 a year on it -- not the $600 he quotes.

4. I actually spend more here, but I consider it an investment in my health. Good thinking too, since my bike has saved my life.

5. Do this one all the time. Our agent knows we do this too. ;-)

Your Hobby and Taxes -- Can You Deduct or Do You Owe?

I've suggested before that a great way to earn some extra income is to turn your hobby into a business.  That said, some of you may prefer to keep your hobby just that -- a hobby (as in non-income producing.) But how the IRS views your hobby -- as a hobby or as a business -- is different than how you may view it.

As you may have guessed, like other things related to the IRS, this can be quite a complicated situation. The Motley Fool tries to explain when your hobby is a hobby, when it's a business, and how you should treat either of these come tax time. Here are their key points:

The IRS has a relatively simple test for determining whether someone is engaged in a hobby or a business. The main issue is whether you are trying to make a profit through your work, which is a goal of businesses but typically not of hobbyists.

However, just because you don't make a profit in a given year, that doesn't mean you didn't intend to make money. The IRS looks at several factors to determine whether you have a profit motive. These include the way in which you operate, how much time and effort you spend on the activity, whether you're financially dependent on the activity for your livelihood, what your level of expertise is, and what actions you take to try to make the activity more profitable. The IRS will also look back to see whether you've made profits in a good number of past years. If you have, you'll more likely be treated as a business for tax purposes. But if you consistently spend more in expenses than you earn in income, the IRS is likely to decide that you don't really have an interest in making money from your labor and will classify what you're doing as a hobby.

Depending on whether your hobby is a business or just a hobby then dictates how you handle it on your taxes. Is it a deduction? If so, what can you deduct? And where? Or did you make money and you owe taxes on it?

I've only had one hobby that was even close to making money (writing magazine articles), and I treated it as a business from the get-go. Why? Because I always intended to earn money doing it and did so from the start. I kept expenses low too, so I always had a profit.

That said, I know many people go from having a hobby for pure fun to developing some income through the years to a point where it's now a business. Just when it goes from being a hobby to a business tax-wise is a tricky question. If you're in this situation, refer to the info above or simply click through and read the full article.

Star Money Articles for the Week of March 19

Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: 

• Consumerism Commentary is focusing on retirement.

• AllFinancialMatters got his Peter Pan rebate check.

• MightyBargainHunter has an allowance.

• Five Cent Nickel dodged a speeding ticket.

• Blueprint for Financial Prosperity weighs in on forever stamps.

• Consumerist has a 9-step budgeting guide for newbies.

Enjoy!

Note: If you're a personal finance blogger and have some good posts you think I'll like, email me the link. If I like them, I'll include them here each week. I just don't have time to read/find all the great posts out there, so send them on and I'll link to the best ones.

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Investing in Charity, Saving Money, and Emergency Funds

Here are a few posts from one year ago today that are worth reviewing:

• The Most Good for Your Charity Dollar - Looking at Your Giving as an Investment - "We need to view our giving in the same way we view our investments."

• Money Saving Tip: Go to the Right Garage Sales - "Go to garage sales in nice, upscale neighborhoods."

• Get an Emergency Fund Now! - "Your single smartest move: Build a cash cushion."

529s Are Not Tax Deductible at the Federal Level, But May Be at the State Level

Here's a question that caught my eye the other day. It's from a Kiplinger's reader who wants to know if a 529 college savings contribution is tax deductible. It caught my eye because the question was from a man in Michigan, the same state I live in. Here's his question:

If I put money into a Michigan 529 for our granddaughter's college, is that a tax write-off, and if you gift money to your children, is that also a tax deduction?

Now I already knew the answer since I recently opened up two Michigan 529s, but I wanted to see how Kiplinger's would respond. Their thoughts:

There is no federal tax deduction for contributions to 529 college savings plans (Uncle Sam's contribution is that earnings can be withdrawn tax free when used for qualifying college expenses). But the state of Michigan does allow state residents to deduct on state returns up to $5,000 ($10,000 on joint returns) of contributions to the Michigan 529 plan.

Yep. Right answer.

For us, this means that our 2006 contributions will save us almost $400. Not bad for doing something we'd do anyway.

But...

I really wish 529 contributions were federally tax deductible. That would be REALLY great now, wouldn't it? ;-)

As far as tax deductibility at the state level goes, it can make a big difference in whether or not you should invest in your state's program or a 529 plan from another state. My best advice is that before you do anything, compare the pros and cons of various plans at Saving for College. That's what I did and the site was very useful in helping me think through all the issues of picking the best 529 plan for my family.

Should You Drop Your Car Insurance on Your Car?

Here's a bit of advice I found interesting. It's from Money Central and suggests when you should drop collision and comprehensive insurance coverage on your car. Here's what they suggest:

Now dig out your last insurance-premium statement. If the annual cost for collision and comprehensive insurance on your car is more than 10% of what you'd get from your insurer, then it's time to consider dropping them.

Say you have a 10-year-old Honda that's worth $4,000 in a private-party sale and have a $500 deductible. Your risk is $3,500. If your premiums for collision and comprehensive are more than $350 a year, it may be wiser to bank that money toward a newer car.

They go on to add a couple caveats to this (such as you're upside down on the car and if you're financially strapped), but other than these, they think you should dump your coverage (note: they are NOT suggesting you cancel the liability portion of your car insurance.)

I don't know. This seems like a bit too early to cancel to me.

Now say your car was worth $2,000, your deductible was $500, you had more than $1,500 in your emergency fund, and the annual premiums were $200. At this point, the 10% rule works for me since your car is worth a small amount and you have a good emergency fund to cover most problems. But consider what happens with a higher-valued car.

If your car is worth $10,000, your deductible is $500, and the annual premiums are $1,000, is it worth it to carry no collision and comprehensive insurance? Not to me. Seems like it would be taking too much risk.

So I'd suggest that for cars in the $2,000 or so value level and below, this could be a good idea. But the more a car is worth, the less I think this strategy is a good deal.

What do you think?

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