Who Insures The FDIC?

 Posted on: Tuesday, October 7th, 2008
Comments: 1

Stacy, You keep educating people on how to check to see if their banks are FDIC-insured but make no mention of how little money and assets the FDIC actually has… They have less than 2% in assets to cover the accounts they are supposedly insuring. 2%. That’s insane. The FDIC isn’t insurance at all. It’s just an illusion of safety. Why are you promoting this?

As for the amount of assets the FDIC actually has: while that’s an interesting number, it’s irrelevant. The FDIC is a government agency and therefore enjoys the full faith and credit of the US Government. So it doesn’t really have to maintain a certain level of cash to be fiscally solvent. The US government has the ability to raise money: first, by extracting taxes from its citizens under penalty of law, and ultimately, if all else fails, by simply printing the currency to repay depositors. So the FDIC can never default on its obligations any more than the US Treasury would ever default on the trillions of dollars it owes to bondholders all over the world.

Another way of looking at this: very few people with a mortgage have more than a few percent of the amount they’ve “guaranteed” on hand in cash. But the lender is nevertheless comfortable because the borrower proved to the lender’s satisfaction they had the ability to repay the debt with their income. In the same way, the FDIC should make depositors comfortable because they have a very high probability of being able to repay depositors. That’s because, despite their having a small amount of cash on hand, their guarantor, Uncle Sam, has the wherewithal to either raise it or otherwise create it.

In summary, the FDIC is more than an “illusion of safety.” It’s the epitome of safety, at least in as much as any paper currency can be deemed safe. (As students of World War II can attest, hyper-inflation of the type that arises from the excess printing of bank notes can render any currency virtually worthless.) But as the only other alternatives to currency are canned food and guns, for today at least I’ll take the FDIC.

And btw, for future reference: those with commercial axes to grind “promote.” Journalists “report.” I’m not a shill for the FDIC or anyone else.

Investing for Retirement

 Posted on: Thursday, September 18th, 2008
Comments: 0

There have been many books written on retirement investing and there will be many more. But I really don’t understand why a distinction is so often made regarding investing for your golden years, because basically all the investing you’re ever doing is for retirement. In other words, the whole point of investing is to make money, and the whole point of making money is so you can stretch out on the sand at the earliest possible moment. So in terms of strategy, there’s really no need to distinguish between investing for retirement and any other kind.

That being said, there are a few characteristics specific to retirement investing that do merit mention. For example, the types of accounts you use. Notice I’m saying accounts, not investments. The investments are the same either way. But there are types of accounts that are unique to retirement investing, and you do need to know about the ones that might be available to you.

Just to make sure that we’re on the same page when I’m talking about accounts versus investments, let’s use an example. Picture a Mason jar filled with beets. The Mason jar is like an account: a place to hold something…in this case beets. The beets are like stocks and bonds: something that needs to be put somewhere.

The point is that an IRA isn’t an investment, and neither is a 401(k) or its non-profit cousin, the 403(b). Like a joint account, a trust account, a uniform gift to minor’s account, or any other type of account, they do have certain unique characteristics. But when you shift to retirement investing, you’re not reinventing the wheel. The accounts you’re dealing with may be a little different than your garden variety, non-retirement accounts, but the investments won’t be. Beets are beets whether they’re in a Mason jar or Tupperware. So when you’re investing for retirement, keep your life simple by sticking with the investments you just learned about: a stock index mutual fund for the owner portion of your savings, and an intermediate-term, high quality bond fund, coupled with a money market fund, for the loaner part. If you’re in an employer-sponsored plan that doesn’t offer these specific options, you’ll just select the options that most closely resemble them.

If all that talk about investments vs. accounts seemed too confusing, just remember this: you can put a stock certificate in a Mason jar, but you can’t deposit beets into your IRA.

Now that we’ve cleared that up, let’s look at what makes retirement accounts different. There are five main things, many of which you may already know.

  1. Sometimes you get free money when you put money in a retirement account.
  2. If you take money out of your retirement account before retirement age, you’ll probably pay a penalty to do it.
  3. You don’t pay income taxes on the money you invest in most retirement accounts. (Or, if you’re investing money that’s already been taxed, you could get a write-off on your income taxes.)
  4. You don’t have to pay income taxes on the profits you make in retirement accounts, at least until you take the money out of the account. The other side of this coin, however, is that you also don’t get to deduct any losses you suffer in these accounts.
  5. Because retirement accounts have these tax advantages, you’re limited as to how much money you can put in them in any given year, and how long you can ultimately leave it there.

Ok, let’s go over these distinctions one by one, starting with my personal favorite, free money.

Let’s say you work at a company with a 401(k) retirement plan. If so, it’s likely that your company is handing out money for nothing. For some reason, however, they don’t call it that. They call it a company match, because for every dollar you put into your 401(k) account, they’ll match your dollar with some money of their own. For example, you put in a buck of your money, they put in 50 cents of theirs. Some companies match dollar-for-dollar, some match 50 cents to the dollar and a few, like mine, offer no match at all. If they do match, they’ll put a limit on the total you’re eligible to get in matching money in any one year; typically six percent of your salary. But however you slice it or dice it, a company match is free money. And since free money is the easiest you’ll ever make, my advice is whenever it’s offered, take it. If you have to contribute six percent of your salary to pick up every cent they’re putting down, do it. Because getting 50 cents for every dollar you invest is like earning a guaranteed 50% on the first day. Think you can do better than that in some other form of investment? Think again. The only scenario when you wouldn’t contribute enough to get the entire company match is when you can’t possibly survive parting with that much of your salary. Even then, I’d rather see you collecting aluminum cans on the side of the road to make ends meet than to leave free money on the table.

The second unique characteristic of most retirement accounts is that if you take your money out before you reach retirement age, you’ll have to pay a penalty. When the government says “retirement age,” they don’t mean the age at which you choose to retire. When it comes to retirement accounts, they mean age 59 ½. This may strike you as confusing, since when it comes to Social Security, the government apparently thinks that retirement age is either 62 or 65. Then why is retirement age 59 ½ for retirement accounts? The only explanation I can offer is that perhaps when you’re in Congress, and therefore don’t actually work for a living, the term “retirement age” is a bit more slippery to wrap your mind around.

In any case, the penalty for withdrawing money from a voluntary retirement account is typically 10% of the amount you withdraw, and that penalty isn’t deductible. In addition, since you most likely haven’t paid taxes on that money yet (we’ll get to that in a second) you’ll also have to pay taxes on money you prematurely remove. Bottom line? You’re better off collecting aluminum cans on the side of the road than taking money out of your retirement plan early.

Depending on the type of retirement plan you’re in, there could be a few situations where Uncle Sam will waive the early withdrawal penalty, but if your contributions we’re taxed going in (like in a 401(k) or tax-deductible IRA) they’ll always be taxed coming out. For example, you can take out up to 10 grand from an IRA (but not a 401(k)) without penalty to buy your first house. Meet the requirements and you won’t have to pay a $1,000 penalty. But you’ll still have to add $10,000 to your income when you file your taxes that year. Which conceivably means increasing your tax bill by thousands of dollars.

Suffice to say your retirement account should be considered in the same vein as a roach motel: your money checks in, but it doesn’t check out. Until you’re at least 59 1/2, that is.

The third thing that makes retirement accounts unique is that you don’t pay income taxes on the money you put into them. Take Sanford Weill for example. If he earns $30,000,000 this year, and contributes $13,000 of it to the Citicorp 401(k) plan (that’s the maximum contribution allowed for 2004) the W-2 that he gets at the end of the year will only show earnings of $29,987,000. Not paying taxes on that $13,000 will save him more than $5,000 in federal taxes alone. Smart move, Sandy! Now you can buy that boss skateboard you’ve been dreaming about.

What if you’re self-employed, and therefore don’t have access to an employer-sponsored retirement account, like a 401(k) or 403(b) plan? You can still get a tax break. If you contribute $3,000 to an IRA (the maximum for 2004, unless you’re over age 50, in which case the maximum is $3,500) you get to deduct your investment, which is the same thing as not paying taxes on that much income. In fact, even if you have a 401(k) plan with your employer, you can still put money into an IRA and deduct it, providing your income isn’t too high.

In addition to being able to exclude retirement account contributions from our income, we also don’t have to pay taxes on any earnings that we make in these accounts until we see that money again. This is a very cool benefit when we’re kicking butt in the stock market, because we could be making money, but getting no 1099 tax form at the end of the year and therefore paying no taxes. But there’s no free lunch, either. Because when we ultimately take that money out, it’s going to be taxed as ordinary income. If it were outside of our retirement account, we might be eligible for capital gains tax rates, which means we’d pay less tax. In addition, while gains aren’t taxable in our retirement accounts, losses that we incur in these accounts won’t give us any write-offs, either. And losses outside of these accounts would give us write-offs. We’ll talk more about these topics in the chapter on income taxes, but keep in mind that a retirement account is no place to lose money. But then again, there is no good place to lose money.

Now we arrive at the final thing that makes retirement accounts a little different. Because of all these tax advantages, Uncle Sam will only let you put aside so much every year. That amount changes, but for 2004, the maximum you can sock away in a 401(k) or 403(b) or 457 is $13,000 and the maximum amount for traditional IRAs is $3,000. Keeping in mind that this is roach-motel money, we’d like to put as much money as possible in these accounts because of the tax advantages. Think of the example with Sandy Weill that I used a little while ago. Socking $13,000 into a 401(k) saves him five grand in taxes. That’s a lot! And even though he’ll eventually be paying taxes on the money when he reclaims it, he’s compounding it in the meantime. In other words, deferring taxes is like getting an interest-free loan from Uncle Sam: you’re “borrowing” the money you’d otherwise be sending to Washington and using it to make more money.

Before we conclude this chapter, let’s go over a few more salient points. First, you’ve probably heard of Roth IRAs. What are they? Simple. Hold a traditional, deductible IRA up to a mirror and you’ve got a Roth IRA. A Roth doesn’t let you deduct the money you’re putting in. Instead, it lets you not pay taxes on the money you’re taking out. There’s also such thing as a Roth 401(k), but they won’t be available until 2006. But the concept will be the same. After-tax money in, tax-free money out.

So, do you want a Roth IRA? Is it better than a regular IRA? The definitive answer is that there’s no definitive answer. That’s because to determine the correct answer you’d have to know things that you can’t know. For example, most financial planners will assume that you’ll be in a lower tax bracket when you retire than you are now. If that’s indeed the case, then you’d be better off taking tax deductions now with a regular IRA, then paying taxes on the gains at your lower tax bracket when you retire. But you can’t know what tax brackets will be when you retire, much less which one you’ll find yourself in. For all we know, the United States will have a socialist government when you retire and you’ll be in a 90% tax bracket. Or you’ll die when you’re 59 ¼ and taxes will be of no concern to you.

I’ve read a lot of articles on this Roth vs. Regular IRA thing and I’ve come to the conclusion that if there is a difference, it’s either based on assumptions that are none too reliable or it’s not enough of a difference to worry about. The one thing that we can say about a Roth IRA, however, is that it’s more flexible than a regular IRA. Because the money that’s going in has already been taxed, Uncle Sam doesn’t get as hinky penalty-wise when you start withdrawing it.

One additional note about 401(k)s: if you happen to work for a publicly traded company and your employer offers their own stock as an investment option within your 401(k) plan, treat that stock like you would any other individual stock. Just say no. The fact that the stock being offered is that of your company doesn’t make it any safer than any other individual stock. And the fact that you’re already staking your paycheck on the bottom line of your company means that putting your retirement eggs into this same basket doesn’t make you the brightest bulb in the box. The only exceptions? When your employer gives you their stock free, since we love free stuff. Or when you have legitimate inside information and are willing to illegally profit from it. In the latter case, remember; sharing is caring. Please let me know.

One more retirement issue, then we’ll call it a chapter. That issue is other sources of retirement income that we normally don’t think about.

When I was a commission-based investment advisor, i.e. a salesman, I was thoroughly trained in the use of fear as a motivator. And what’s more fear-inspiring than the thought of spending your retirement years living in a cardboard box and pushing a shopping cart around? Consider the following sample conversation…

Me: So, Ms. Prospect, how old are you?

You: I’m 35.

Me: And how much have you put away for retirement so far?

You: Well, let’s see…total? About $1,500. But I’m adding $100 a month to that.

Me: Congratulations! That’s great! If you retire at 65, that means you’ve still got 30 years to go. Let’s see how much you’ll save. (At this point, I pull out my calculator and start tapping away.) Hmmm…$1,500….$100 a month…we’ll assume a 10% annual return…alrighty then! Keep it up and by the time you retire, you’ll have a whopping $255,805! Of course, 30 years from now that amount of money will probably only buy a candy bar. But let’s look at a best-case scenario and assume that there won’t be any inflation at all. And we’ll assume that when you turn 65, you’ll start using the interest on your savings to generate retirement income. That means you’ll be getting $25,580 a year..10% of your $255,000. You won’t have any problem living on a couple grand a month will you?

You: Live on $2,000 a month? Of course I can’t live on $2,000 a month! What are you, nuts?

Me: Then I guess we better start saving a bit more, wouldn’t you say?

You: Well, I guess so. I’ll just cut back on a few expenses. Electricity and water are really just foolish luxuries anyway, right? And, now that I think about it, who needs a phone?

Me: Now you’re talking! Let me just get your signature on a few papers here….

What’s wrong with this picture? Plenty. First, I conveniently forgot to mention one major retirement plan you’re already contributing to. Namely, Social Security. If you go to www.ssa.gov/planners, you’ll find a lot of very useful information, including calculators that will help you estimate what you’ll be getting when retirement rolls around. For example, simply input the age of 35 and the annual income of $50,000, choose to see your estimated benefit in future (inflated) dollars, and in the blink of an eye you’ll see that at age 67, you could be receiving $5,000 a month in Social Security benefits. If you choose “today’s dollars” instead of “future” dollars (future dollars reflect the probable result of inflation) you could be getting an extra $1,500 a month. Granted, $1,500 bucks a month isn’t radical wealth, but it’s certainly not something to ignore when you’re planning your retirement. And if estimated amounts aren’t good enough, the Social Security website also allows you to request your own Social Security Benefits Statement, which will reveal more precisely how much you’re personally likely to receive.

Another thing that I forgot to ask my prospect is what they might stand to inherit. Even if you come from modest means, it’s certainly possible that at some point prior to reaching retirement age you’ll get a cash injection by inheriting some money. How many financial advisors ask this question and add the answer into the mix? It’s important…so when you’re doing your own retirement planning, don’t forget it.

In conclusion, the point of this chapter is to illustrate that investing for retirement is no different than any other kind of investing, and therefore should require little additional time and little additional knowledge. As you may have noticed as I went over various retirement accounts, these plans have tons of niggling rules attached, and those rules are always changing. Therefore nobody knows them, at least not for long. While I could have swelled the pages of this book by delving into each variation and specific rule applying to each account, I didn’t see the point. Because at the end of the day the only plan that matters is yours and the only time the niggling rules affecting your account matter is when you need to know them. And odds are that’s not now. If you work at a company with a 401(k) plan, there’s a person there who will tell you more than you’ll ever want to know about the rules affecting your specific account. If you’re self-employed and need to know what options you have, ask an accountant or go to a website like irs.gov, or do a search for “tax advice” or “retirement plan advice.” But once your retirement plan is in place, providing you follow the same simple asset allocation rules that we’ve already discussed, you don’t have to think about it more than a few minutes a year.

The bottom line is that whether your assets are taxable or tax-deferred, they’re still your assets and therefore subject to the same common logic of asset allocation that we’ve already discussed. Subtract your age from 100. That percentage belongs in ownership stuff. Whether that stuff is in a Roth IRA, a 401(k) or a joint account with your Aunt Agnes doesn’t matter. When you boil it down, the only differences between retirement accounts and any other is tax breaks when you put money in and tough breaks if you need it before retirement.

Use your retirement accounts to get as many tax breaks as you can, and avoid tough breaks by only investing money in these accounts that you probably won’t need to withdraw prior to retirement. Simple enough?

205 Ways to Save Money

 Posted on: Thursday, August 28th, 2008
Comments: 1

  1. Pay attention to where your money is going. Carry a little memo pad around and keep track of everything you spend. Like magic, the simple act of writing stuff down will often keep you from spending money. It also helps you to look at where your money is going and allows you to make informed decisions about how much money you really need to live the life you want.
  2. Make a simple spending plan. You wouldn’t think of setting off on a long trip without a map. A spending plan is simply a map to help guide you to where you’re going financially. It allows you to set goals and evaluate your progress. There’s no successful company that doesn’t plan their cash outlays. Why don’t you?
  3. Make sure everybody’s on the bus. Changing your spending habits is hard to do if everyone else in your life isn’t reading from the same page. Make sure everyone in the family is committed to the trip before you leave the curb.

    4. Smart Shopping

  4. Be a bargainer. When you’re buying something expensive, or buying a service, always bargain on price. It never hurts to ask, and if you’re buying something big, like a TV, a refrigerator or a computer, you might save yourself 10 to 20%.
  5. Cash is king. Again, if you’re buying something expensive, ask for a discount for using cash. Did you know that when you use a credit card, the merchant has to pay two to four percent to the bank? Therefore, when you pay cash (or write a check) you’re saving them that money. Ask for it!
  6. Don’t buy extended warrantees. Eighty percent are never used, and they’re a major profit item for the vendor. That’s why they push you so hard to buy them!
  7. Don’t wait till the last minute to shop. Obviously, less time gives you less flexibility. The seasons, the start of school, birthdays, Christmas: nearly everything we shop for is pretty darn predictable.
  8. The calendar is your friend. Consider the times of the year that retailers love most: holidays! Halloween, Valentines Day, Christmas and Thanksgiving are all great times to save money… if you’re willing to wait a bit. You’ll often see big pre-holiday sales that happen prior to these holiday times, but those savings pale compared to the discounts you’ll get by waiting until the days after the event. Buy next year’s Halloween costume on November 1, your Christmas decorations on January 1, etc. Want to get even better deals? Try outlet malls.
  9. Always use a list. And don’t buy anything that isn’t on it. Depending on what you’re shopping for, you can easily save 10 to 15% with this tip alone.
  10. Don’t shop hungry. If you’re shopping for food, it’ll make you buy more. If you’re shopping for anything else, it’ll make you hurry. Also avoid shopping depressed. Buying stuff you don’t need won’t make you feel better, but if you’re not careful you’ll do it anyway.
  11. Shop alone. Kids and spouses that act like kids will often whine, cajole or otherwise try to influence you into impulse buys. Leave ‘em at home.
  12. Keep receipts and send in rebate slips. Very few consumers actually return rebate coupons. Which is, of course, exactly what the manufacturers are hoping for. Don’t be a sap… get what you’ve got coming. Keep your receipts and don’t hesitate to return anything that disappoints you in even the slightest way. Keep in mind that many stores will refund the difference if you find an item cheaper elsewhere after you’ve bought it and most will match competitor’s prices.
  13. Get 10% to 15% off by opening a department store credit account. Stores often offer you substantial discounts to induce you to sign up for (and get hooked on) their high-interest credit cards. Fine. Take them up on their offer and get your discount. But when the statement comes in, pay the bill in full and cancel the card in writing. Don’t just stop using the card: if you don’t officially cancel the account, it will continue to be reflected on your credit history.
  14. Don’t pay for extra features that you don’t need. Fancy extras on everything from cars to VCRs are often high-profit-margin items for manufacturers and dealers. Even if it only costs “a little more” why buy things you’ll never use? Fewer gadgets can also mean longer product life with less in repair bills.
  15. Buy your furniture and appliances pre-scratched. Scratch-and-dent can save you plenty, especially when you bargain down the price even more.
  16. Open your own temporary store by having a garage/yard sale. You probably have lots of stuff that you don’t want or need, and that’s just money that’s lying around your house. Spend a day going around your home and identifying everything that you haven’t touched in a year. That’s stuff you should probably either sell or donate to charity. If you decide on a yard or garage sale, talk to neighbors first and see if they’ll join you: the more stuff you have and the more people you have, the better off you’ll be. Publicize the sale with signs around the neighborhood (providing they’re legal) and a newspaper ad several days in advance of the sale. List your best items in the ads (e.g., tools and antiques are top draws.) Prepare carefully for the sale. Segregate items by price ($.25 table, $.50 table, etc.) and use colored tags to identify items. Make it simple for shoppers and for you. If you don’t sell everything, that may not be all bad, because in some cases, you might be better donating items to charity anyway. For example, if you’re going to sell a shirt for ten cents, you might be able to donate it to Goodwill and get a $1.00 tax write-off. That could save you more in taxes than you’d have gotten from selling it for cash. When you have a sale, beware of shoplifters. Believe it or not, people will actually steal things that they could buy for a dime!
  17. Buy at yard and garage sales. This is the smartest shopping you can do, providing you confine your purchases to only what you actually need.
  18. Share the cost. If you’re going to buy something that is useful to your neighbors and only needed occasionally, start your own “co-op.” Splitting the cost of a ladder, lawn mower, gardening equipment, tools, and many other expensive items will reduce their cost by at least half (depending on how many people are in your co-op) and will barely register on the “inconvenience scale.”
  19. When clothes shopping, start at home. Many of us go to the store and buy clothes when we already have similar items at home that we’ve forgotten. Do a careful inventory of your clothes before you buy anything, including the ones you have tucked away in the back of your closet or attic. Added bonus: this will also allow you to make money by selling, consigning or donating things you’re not ever going to wear again. Staying in Shape
  20. Walking or jogging in your neighborhood is free and fresh air is better than the air in a health club.
  21. Buy inexpensive workout and aerobic videotapes and use them at home with your TV. You could easily get a better workout than you’d get at a health club, and you can own the tapes for $5 to $10 each. Rent them first until you know you like them.
  22. If you insist on joining a health club, try joining for a month or buying a series of single-day passes first to make sure you’re going to have the time and discipline to stick with it. Avoid long-term membership contracts.
  23. Avoid buying sports accessories until you know that the activity is a fixed habit. For example, don’t buy a gym bag until you’ve been to the gym 20 times. Don’t buy good inline skates until you’ve racked up 200 miles on the cheap ones. Reward yourself with a Walkman after you’ve jogged 20 miles with only the sound of the wind in your ears. Then buy all that stuff used.

    24. Transportation: New Cars

  24. Avoid new cars. Because cars are made better now than they used to be, buying used isn’t as risky as it used to be. Buying a car even two years old can save you from 25% to 40%. But if you are going to buy new…
  25. Always negotiate price, never payments. Payments can be manipulated so that practically anything is affordable. Salespeople will always try to get you to talk payments. Good negotiators always talk price: the payments will take care of themselves.
  26. Choose your make and model carefully. You obviously want to buy a car that’s within your price range, but don’t forget to consider other costs, like insurance, gas mileage, maintenance and repair. These numbers are available in new car guides at your library or online at websites like www.kbb.com and www.edmunds.com.
  27. Get the dealer’s invoice price before you shop. You can find it at many web sites (like the ones above) or in new-car guides at the library. Your objective is to pay no more than 3% over the invoice amount. Don’t forget to also get the dealers invoice price of the options you want on your car and negotiate those too!
  28. Just say NO to fees. One of the main ways dealers make money on cars is to pad prices with extra fees like “documentation,” “advertising” and all kinds of others. Eliminate the ones you can, understand the ones you can’t, and check the final contract to make sure that eliminated fees don’t magically reappear.
  29. Always get pre-approved for a loan before you shop. Even if you end up using dealer financing, it’s important to know how much you can borrow and what the rates will be. That makes you a tougher negotiator. You’ll especially need to know this information in order to choose between a rebate and low-interest financing. There are online calculators that will help you decide between a rebate and low-interest financing (do a web search), but generally, the rebate is the best option.

    30. Transportation: Used Cars

  30. Always buy used. A two-year-old car may have depreciated in price by 50%, but it’s still got 70% of its useful life left. That’s why used cars are nearly always a better deal than new. Plus, the insurance cost is lower.
  31. Always be pre-approved for a loan before you shop. Like with new-car shopping, you want to have all the loan details worked out before you go shopping. That way when you find what you’re looking for you can pounce before it gets away.
  32. Do your homework. Check the cost of repairs, maintenance, licensing, fuel and insurance before you decide on a make and model. Then arm yourself with the suggested retail and wholesale prices. You can find them at car websites (see number 26 above), in used car guides at the library or through your credit union or other lender.
  33. Check with private sellers. Dealers offer the advantage of broader selection and in some situations, warrantees. Private sellers may offer you a better deal, however, and you also get to see who’s been driving the car and how it’s been kept and maintained. But the greatest advantage of private sellers is that you don’t have to feel outclassed sales-wise.
  34. Make friends with a mechanic or two. Mechanics often hear of people who want out of their car. They cannot only help you find a great car at a great price, but they can sometimes vouch for the condition of the car.
  35. Don’t think of buying a used car without a thorough inspection. Even if your car of choice was driven only to church on Sundays, have it thoroughly inspected by a qualified mechanic before you think of buying it. This cannot only help you avoid a nightmare, it could also help you negotiate a better price.

    36. Transportation: Leasing Cars

  36. Leasing is more complicated than buying. But when you boil it down, leasing is essentially like financing part of a car’s life. There are three main components to a lease: the capitalized cost (”purchase” price), the money factor (interest rate), the residual value (what it’s worth when the lease is up). You should be familiar with each of these terms, because changing any one of them will change the lease payments. And when you approach leasing, ignore payments. Negotiate the capitalized cost just like you would if you were buying, then the money factor, just like you would if you were borrowing. Let the payments take care of themselves.
  37. Be aware of the fees for excess mileage and excess wear and tear. They should show up in microscopic print somewhere in the contract. Understand them, and realize that average lease return fees total more than $1,000. Think about that before you lease.
  38. Whether you’re buying or leasing, negotiate the value of your trade-in before you negotiate the new car. Actually, you should never trade in a used car. You’re nearly always better off selling it yourself. But if you are going to trade in your old car, establish its value first before you start on the new car purchase. The dealer will want to make it a part of the new car transaction. It isn’t.

    39. Transportation: Repair, Maintenance, etc.

  39. Always use the lowest octane gas your owner’s manual suggests. While only 15% of cars require premium, 25% of gasoline sold is premium. Why? Probably because some people respond to advertising instead of reading their owner’s manual.
  40. Keep your car tuned and check your tires. These simple things can easily save you $100/year in gas, not to mention giant increases in your engine and tire life.
  41. Car pool! Sharing the ride with just one other person will cut your commuting costs in half. You’ll also reduce your stress level by 50%.
  42. Keep your air and fuel filters clean. Your car will perform better, your mileage will increase and your engine will last longer. Best of all, these items are inexpensive.
  43. Make it a habit to be a smooth operator. Scan the road ahead and try to anticipate any slowdowns. Try to maintain as constant a speed as possible. That will save gas and make you a safer driver.
  44. Lighten up. Roof racks hurt mileage by spoiling your aerodynamics. If you don’t use ‘em, lose ‘em. To increase your mileage even more, take the excess weight out of your car.
  45. Get a good mechanic. The best way to save money on cars is to keep yours as long as possible, and the best way to do that is to have it serviced well and regularly. To find a good mechanic, try calling some classified ads placed by people selling cars similar to yours. They might have a good suggestion. In most cities, you can also check with AAA, even if you’re not a member. At the minimum, find a mechanic that’s certified and experienced with your type of car. Always get estimates in writing before work is done and always get used parts back.
  46. If they’ll work as well, try used or rebuilt parts. Your mechanic or body shop will know if OEM (Original Equipment Manufacturer) parts are necessary or desirable. If they are, fine. But if they’re not, you can save a bundle.
  47. Shop rental cars! If you’re going to rent a car, comparison-shop heavily. Prices differ a bunch depending on company, current demand and location. Don’t hesitate to pit companies against each other. And ask as many times as possible about special deals, promotions, coupons, and any source of potential savings such as membership in AARP or AAA. Even while you’re standing at the counter waiting for your reserved car, it’s not too late to ask for a discount or free upgrade. Sometimes a smile and a simple request will do wonders.
  48. Don’t buy rental car insurance if you can avoid it. These policies rank high among the western world’s great rip-offs. Your regular car insurance or possibly even your gold credit card will often render it unnecessary. Check before you leave home.
  49. Keep change in your car. How many times have you not fed a parking meter because you couldn’t find any change? Keep some in your car at all times and avoid unnecessary tickets.
  50. Make travel less taxing. Keep a little notebook in your car so you can record the mileage you log on deductible trips. Trips to the doctor, job-hunting trips, trips for charity: all deductible, which means you could be on the road to lower taxes.

    51. Insurance

  51. Consider consolidation. Some insurance companies offer substantial discounts for insuring both your home and car. See if yours is one.
  52. Raise your deductibles. The easiest and fastest way to lower insurance bills is to raise deductibles. Going from a $250 to a $1,000 deductible can reduce your home or car coverage cost by 20%, and only takes about three minutes.
  53. Don’t buy credit life. These are gimmick policies that are basically life insurance that’s tied to specific debts, like a credit card or mortgage. Regular term life insurance is a much less expensive alternative.
  54. Don’t buy whole life insurance. Whole life, or permanent life insurance, combines a life insurance policy with an investment account. Unless you’re rich and need a permanent policy to help pay estate taxes, it’s generally a better idea to buy cheaper term coverage and do your own investing separately.
  55. Don’t insure your child’s life. The purpose of life insurance is to replace the earnings of a key breadwinner in the event of untimely death. While the death of a child is certainly a tragedy, it’s rarely a financial calamity. There are better investments you can make for a child.
  56. Shop your coverage. Whatever type of insurance you have, you should shop it every six months. This is a competitive business, and getting more so all the time. So pull out those policies and make sure you’re getting the best deal!
  57. Cancel your car coverage! This may seem like a strange idea, but if the cost of your annual comprehensive/collision coverage is more than 10% of the value of your car, you could consider dropping it. (Obviously you should never under any circumstances drive without liability!) For example, if you’re paying $500 in comp/collision premiums to cover a car that’s only worth $5,000, you’re at the 10% threshold. If the potential loss of $5,000 worth of car is worth not spending $500 every year, consider dropping the coverage. This is only an option if you don’t have a loan on the car, since lenders require you to maintain full coverage to protect their collateral.
  58. Flaunt your good driving record. If you’ve had no accidents or tickets during the last three years, make sure your rates reflect that. Most insurance companies don’t automatically lower your premiums when old citations fall away. You have to call and make them reduce your bill.
  59. Get what’s coming to you! Keep the following list of possible discounts available and ask for them all when you get car insurance quotes (many might be applicable to homeowners as well.) Accident-free, multiple cars, short mileage (usually less than 7,500 miles per year) good student, absent student (if your kid is away at school without their car, they might reduce your family rate), over 50, graduate of defensive driving course, nonsmoker, airbags, antilock brakes, automatic seatbelts and antitheft devices. Any of these possible discounts could save you money. And when you’re done reciting them to the insurance company, be sure and ask, “Did I leave anything out? Do you have any other ways for me to save money?”
  60. If you’re changing policies, make sure your new one is in effect before you drop your old one. This applies to every kind of coverage: health, life, homeowners and automotive.
  61. Get rid of PMI ASAP. Private mortgage insurance (PMI) is normally required if you have less than 20% equity in your home. And it can easily cost $50 a month! As soon as you’re sure you’ve got the magic 20%, whether it’s by appreciation or paying off mortgage principal, call your lender and tell them you want out of PMI. Expect them to make you jump through hoops since they make tons of money from this coverage.
  62. If you’re going to buy travel insurance, make sure you only get coverages you need, like trip cancellation coverage. Policies insuring your luggage are normally so riddled with exceptions that they’re virtually useless.
  63. Don’t buy specialty insurance, like cancer coverage. Put your money into a good general health insurance policy instead.
  64. Keep health insurers honest. If you’re like most people, you pay no attention to your health coverage. So when your insurer messes up, which they frequently do, you don’t know it. For example, many policies have a deductible of $200 per person, $400 per family. But are you keeping track of when you reach those magic numbers? Don’t assume your insurance company is. Read and understand your policies and keep your own tally: you may need it for tax purposes anyway.
  65. Don’t let your doctor cost you money. If your health insurance provider agrees to pay 80% of covered procedures, that generally means they’ll pay 80% of what they think is reasonable for that procedure, not 80% of whatever it costs. So find out what your insurance company is willing to pay and if your doctor can do it for that amount.
  66. HMOs are normally the cheapest way to get health coverage. In the world of health, choosing your own doctors is an expensive alternative.

    67. Banking

  67. Shop your banking services carefully. As banks consolidate, competition is decreasing and fees are increasing. Think about the services you need first, then call around and see who can deliver them for the least money. Do you do a lot of ATM transactions? Then you need a bank with lots of branches and ATM machines to avoid paying “foreign” ATM fees. Do you travel a lot? Then you want a bank with branches in the states you often visit. Do you need online banking? Find a bank that doesn’t charge for this convenience. Do you write just a few checks a month? Find a bank with a stripped-down inexpensive checking account. You get the picture. Think about what you need before you go shopping, and be sure you understand all the fees before you sign up. In general, you’re going to get better deals from smaller local banks rather than the biggies.
  68. Don’t use a bank! Instead, use a credit union. Credit unions generally offer lower rates on loans, higher rates on savings, and lower fees than commercial banks. To find one that will accept you as a member, ask your employer or open the yellow pages and make a few calls.
  69. Use only your bank’s ATM. Avoid fees to get to your own money!
  70. Don’t use a passbook savings account. These accounts are old-fashioned and pay very little interest. You’re much better off with your bank’s money market account. You’ll earn more interest, your money will be just as safe, and you’ll still be able to get to it at any time. For a little more interest with just a tiny bit more risk, consider money market mutual funds. These aren’t federally insured like bank money markets, but they’re normally plenty safe.
  71. Check your checks! There’s no law that says you have to buy checks and deposit slips from your bank. There are companies that will sell them to you for 50% less.
  72. Don’t pay fees to have a checking account. There are now online banks that will charge you nothing for your checking account, and even pay interest on it. Shop around, and you might even find the same with old-fashioned bricks-and-mortar banks. Eliminating the fee on your checking account could easily save you $100 a year.
  73. Be aware of fee changes. Did you know that banks most often mail notices of fee increases between Thanksgiving and Christmas? That’s because they know that you’re least likely to read it during that busy time. Don’t let them fool you. Read fee notices.
  74. Ask and you might receive. Years ago, Money Magazine called 10 credit card lenders and merely asked them to lower their interest rates. Three out of 10 did it! This could work in all areas of banking. If your bank is charging you high interest or high fees, try saying something like, “Gee, I’ve banked here for years, but I can get much better deals from your competitors. Can’t you lower (eliminate?) this fee (interest rate) so I don’t have to leave you?” You’d be surprised how often this simple tactic could work.
  75. Go direct! Direct deposit of money you receive and direct payment of bills you owe can save you postage, gas and hassle. And it could increase your interest earnings to boot. See what your bank offers and take advantage of it.
  76. Balance your checking account! Estimates of people who don’t bother to reconcile their checking accounts range from 6% to 20%. If you don’t keep track of what’s in your account, you should just carry cash. Because sooner or later, you’re going to be paying giant fees for bounced checks!
  77. Give yourself credit. If you’re going to have credit cards, get the best possible deals. If you pay off your balance every month, get a card with no fee. If you don’t, get the lowest possible interest rate, but don’t forget to include any annual fees in the interest price you’re paying. You can find good credit card deals in magazines like Money and Kiplinger, or online at web sites like www.bankrate.com and www.ramresearch.com. And, as you’ve learned from reading this book, remember that a life with no debt is always your best option.
  78. Be aware of “stealth” fees. Hidden fees abound in credit cards. They include fees for going over your credit limit, transferring your balance to another company and paying late. The only way you have of finding out about these fees is to call the issuer or read the microscopic print found on the original disclosure paperwork or monthly statements. You should also be aware that your card issuer can sell your account at any time to a company that will change every term you have including the interest rate. Be vigilant.
  79. Know the lingo. When we shop for credit cards, or any loans for that matter, the focus is always on the interest rate you’re being charged. While that’s obviously the main thing, it’s not the only thing. In the case of credit cards, you also need to inquire about “grace period.” That’s the period of time you have after using the card before the interest clock starts ticking. Twenty-one days is typical, but obviously the longer the better. You also need to know about all fees: the annual fee, and any possible fees that could occur on cash advances, late payments and balance transfers. Once you’ve uncovered all the costs, only then can you really compare apples to apples.

    80. Investing

  80. Join your employer’s voluntary retirement plan, especially if it offers a match. After your debts are paid off, saving through a retirement plan has some great advantages, like investing automatically and being able to defer the taxes on the money you make. Even before you pay off your debts, you should enroll in a plan and deposit enough to get the full match from your employer. If your employer is offering a 50% match, that’s like earning 50% on your money with no risk! That’s a deal that’s hard to beat.
  81. Don’t buy load mutual funds. A “load” refers to a commission, and there’s no reason for you to ever pay one. If you’re buying a mutual fund through a financial advisor of any kind (except ones you pay by the hour), you’re undoubtedly going to pay a load. Do your own research, buy your own funds, and don’t pay a commission.
  82. Buy stocks direct, then DRIP by DRIP. You can buy nearly 1,000 different stocks by going direct to the company that issues them. While the fees charged for doing this vary from company to company, they are often much less than the fees you’d pay by going through a broker. DRIP refers to dividend reinvestment plans that allow you to reinvest quarterly stock dividends into additional shares of stock. There is normally no fee for this service. To find out if the company you’re interested in offers direct investment and/or DRIP plans, you can call the company’s investor relations number and ask them. To get a company’s investor relations phone number, you can either go to the website of any online brokerage firm (try www.etrade.com) and look up company research, or you can go to your public library and look in investment guides (try Value Line.) There are also websites that, for a small fee, will help you establish direct investment and DRIP accounts. One example is www.directinvest.com.

    83. Real Estate

  83. Time your home purchase. The hardest months to sell a house are the best months to buy one: October, November and December.
  84. Sell it yourself. Real estate commissions are among the costliest of fees, especially considering the value you get in return. If you’re in a lousy housing market, you may not have a choice: realtors will expose your home to the maximum number of potential buyers. But if the market’s popping, try selling it yourself, after reading a book or two on the subject. Many other people have gone this way successfully and it’s a way to save many thousands of dollars!
  85. Buy direct from sellers. People who sell it themselves are saving money on real estate commissions. They should be able to sell for less. But doing things without realtors also means more education for you. So be knowledgeable before you try bringing home the savings.
  86. Don’t even think of buying a house until you’ve had it thoroughly inspected. Not only will you be more comfortable with the purchase, but you can use the report as leverage to get the price lowered. (The inspector will ALWAYS find something wrong.)
  87. Negotiate Rent. For some reason, everybody knows they’re supposed to negotiate house purchases, but almost nobody thinks of negotiating rent. Why should you pay the same rent as the punk rockers upstairs? You’re a quiet, high quality, self-sufficient tenant who will be less hassle than other people. Therefore you should pay less rent. (Trust me, as a former landlord, this is absolutely true.) Another technique that may help you negotiate lower rent is to offer to pay several months up front. These ideas may not work, but it costs nothing to try.

    88. Energy Savings

  88. Get a free energy audit. Many utility companies will come out to your house for free or at a nominal cost and tell you how to save money. If yours will, let em. And while they’re there, ask if they have any off-peak, load-management or other savings programs.
  89. Here’s a bright idea. Florescent bulbs use 75% less energy than incandescent and last up to 10 times longer. Use as many as you can. And for non-reading lights, lower the wattage of your bulbs.
  90. Run your dishwasher less. One less time per week can save you $50 per year. And air-drying your dishes will also save.
  91. Buy energy efficient appliances. Those yellow energy-guide stickers are important reading, especially if you’re shopping for a refrigerator, air-conditioning or a furnace.
  92. Change your filters. Keeping your furnace and air conditioning filters like new can save you up to 10% per month on costs. Don’t check them once a year, check them once a month.
  93. Seal it up. Use a lighted candle to detect air leaks around doors and windows. Caulk is much cheaper than electricity.
  94. Dial for dollars. Turning your thermostat dial up or down by just one degree can reduce your energy bill by up to five percent per month.
  95. Use ceiling fans. Ceiling fans cost less than 1/10 of what air conditioners cost to run. In the winter, reverse the blade direction to force warm air down from the ceiling.
  96. Insulate. Adding insulation can reduce cooling and heating costs by up to 20%. Some utility companies even offer rebates to help defray the cost, and the cost isn’t that much anyway. You can add insulation to a 1500 square foot home for about 200 bucks. Extra insulation in the attic can easily pay for itself in a few years.
  97. Try a heat pump. While they may not be the perfect solution for all parts of the country, a heat pump can reduce your power bills by 40%.
  98. Be careful with vent fans. Believe it or not, a kitchen or bath ventilation fan can completely empty a house of warm or cool air in about an hour. Use them, then turn them off.
  99. Use your drapes. In the winter, open your south-facing drapes during the day to capture heat, then close them at night to keep it in. Do the opposite in the summer.
  100. Beware portable heaters. Using a portable heater costs close to nine cents per hour. So using one eight hours per day will cost about five bucks a week, or $20 per month.
  101. Pay attention to the temperature. An indoor/outdoor thermometer can tell you when to open and close your windows and doors.
  102. Close off rooms you’re not using, but be careful about closing vents. Closing too many vents can reduce the efficiency of your heating and cooling. This is especially true for heat pumps.
  103. Be a stripper. Weather strip all your doors and windows.
  104. Cover yourself. An electric blanket only costs a little over a penny per hour to operate. Buy one cheap at a yard sale.
  105. Go for the juice. A 220-volt air conditioner is cheaper to run than a 120 volt.
  106. Use turbines. Turbine fans on the roof will let out summer heat, but be sure to cover them in the winter.
  107. Stay out of hot water. You can buy a water heater blanket for about $15 that will save you about $50 per year. And while you’re at it, insulate the pipes as well. If you can set your water heater to only be used at certain times of the day and turned off at night, you can save $20 per month.
  108. Don’t be a drip. Leaky faucets are a problem, but leaking hot water is an emergency. Hot water drips can cost you $25 per month!
  109. Grow some savings. A tree planted on the south side of your house can provide shade in the summer. Don’t plant an evergreen, though: you want those leaves gone in the winter.
  110. Turn off your furnace pilot light in the summer. You can also save by turning off your stove’s pilot light and using a lighter.
  111. Use your fireplace. Wood is still usually cheaper than gas. But be sure and close your flue tightly when you’re not using it, and make sure the fit is snug. Caulk around the hearth. If you don’t use your fireplace at all, plug and seal your chimney flue.
  112. Dress for success. Don’t try to stay dressed in shorts all winter long. Wear clothing appropriate to the season, and adjust your thermostat accordingly.
  113. Put your water on restriction. Low-flow showerheads can save a family up to $200 per year by reducing water flow by up to 50%.
  114. Water early. Try to water between six and eight AM. That minimizes evaporation.
  115. Don’t waste water. You don’t need to run the water while you’re shaving or brushing your teeth.
  116. Save a load. Every load of wash uses between 25 and 50 gallons of water. The same is true of your dishwasher. And you shouldn’t need to soak or pre-wash dishes unless the food is burned or otherwise stuck on. By the way, the amount of detergent you use for both clothes and dish washing could probably be reduced. Try using ¾ of the amount recommended.
  117. Go out back and hang out. If you’ve got a decent sized family, hanging your clothes out to dry can save you $40 a month in electricity.
  118. Be cool. Using cold water only can save you 90% of the cost of washing your clothes. Disconnect the hot water hose.
  119. Refrigerator etiquette. If you’re buying a new refrigerator, remember that top mounted freezers are cheaper to operate than side-by-sides, and don’t buy more refrigerator than you need. Automatic ice makers add about $200 to the initial cost of a refrigerator, cost about $50 a year to operate and are the first thing to break. If your refrigerator is old, check the seal by putting a dollar bill in the door. If it falls out, replace the seal. Keep the cooling coils in the back clean. And avoid repeated opening of your refrigerator door. When you’re getting ready to cook or cleaning up after a meal, make it a game to see if you can open the refrigerator door only once.
  120. Oven etiquette. Use energy saving appliances like microwaves, pressure cookers and toaster ovens instead of always using the oven or stove. You can buy ‘em cheap at yard sales. Turn off your electric burner three minutes before the rice or pasta recipe calls for: it’ll stay hot that long. Same with your oven. And if you are going to bake in the oven, why not throw in an extra potato or two for tomorrow’s casserole?

    121. Telephone Savings

  121. Use the Internet! Email is free. Long distance calling isn’t (unless you also do that on the Internet!) The Internet is also a great free way to find numbers instead of using directory assistance. But if you are going to use directory assistance, your local one (411) is almost always cheaper than the national ones you see advertised on TV.
  122. Stop leasing. You’ll usually save money by buying your own phones.
  123. Hang up on frills. The phone company is a master at getting us to buy services. They sell your phone number to telemarketers, then sell you caller id to thwart them. In round two, they sell services that block caller id to telemarketers, then sell you a gadget that won’t allow blocked calls to ring through. Don’t play this ongoing game. Get the basic package, skip the frills and save yourself $100 or more per year.
  124. Turn the tables on telemarketers. One of the most popular TV news stories I’ve ever done involves changing from victim to predator in the cold-calling jungle. Here’s how it works. Federal law requires that almost anyone who solicits you by phone give you their name and either address or phone number (which they virtually never do.) The law also requires that they call between the hours of 8 am and 9 pm. And if you ask to be put on their “do-not-call” list, nobody from that company is allowed to call you for ten years. Finally, they’re required to furnish you with their written “do-not-call” policy upon request. Now, here’s the cool part. Companies are allowed one mistake per year, then they are subject to a $500 fine per violation. So here’s what you do: keep a pad and pencil by the phone. When you’re cold-called, ask to be put on the “do-not-call” list, and ask for a copy of their written policy. Make a note of the date, time and person you talked to. If that company contacts you again, let them know you’re supposed to be on their “do-not-call” list. That was their one allowable mistake. If they call you again, get their address, because you’re about to make some money. Send a letter to the company threatening to sue them in your local small claims court for $500 per offense because the company is in violation of the Telephone Consumer Protection Act. More than likely the company will offer you a check ($250 to $300) to avoid the hassle of a court hearing that they’re going to lose. Believe it or not, informed Americans have already collected hundreds of thousands of dollars with this strategy (and no doubt had fun doing it!) That’s just the gist of what you need to know, however: to learn more, go to www.junkbusters.com. Sites like this can also help you reduce your junk mail.
  125. Shop your long distance. Internet sites like www.trac.org and www.abelltolls.com can help you find the best long distance calling plan for your needs. If you don’t have Internet access, go to the library. Remember: part of your monthly phone bill goes to pay for library Internet access, so use it! Even if you aren’t willing to go to the hassle of finding the best long distance deals, at least call your current long distance provider and make sure you’re on the cheapest plan for your needs. Before you start shopping long distance, be sure and look at a few bills to see what your calling patterns are. Do you make most of your calls to one person? Mostly night and weekends? How long are your average calls? How much do you typically spend? This type of information is important to know before you can find the best overall plan for your family. And, just as with other services, don’t be afraid to ask for a discount. The way to do it is simply to say you’ve found a better deal elsewhere and ask your current company to match the rates. Don’t lie, however: they’re likely to verify the information.
  126. Know the lingo. It’s hard to shop smart for something when you don’t know what questions to ask. In long-distance land, there are three major ones. First, “What is your cost per minute?” Second, “What is your billing increment?” Billing increment is crucial if you make lots of calls, and especially lots of short calls. Billing increments for the “big three,” AT&T, Sprint and MCI/WorldCom, are typically one minute. That means if you talk for one minute and one second, you get charged for two minutes. Other companies may have billing increments of only six seconds, which is obviously a better deal. Third question: “What fees will I pay?” Many of the larger companies charge a fixed monthly fee in addition to their rate-per-minute. Depending on what you’re spending, this seemingly small fee could radically change your cost-per-minute.
  127. Don’t take their word for it. We tend to regard anything printed out by a computer as accurate, which is often far from the case. Look at your bills and make sure you’re actually paying the per-minute rate you were promised. Mistakes abound, and by some odd coincidence, they almost always seem to favor the company!
  128. Don’t forget calling cards! If you travel, calling cards are important because they allow you to get the same rates from the road that you’re used to paying at home, at least theoretically. But the big three long distance carriers often have ridiculously high rates and fees for their cards. Before you enroll in any plan, be sure to ask about calling card rates. If the plan is otherwise perfect but the calling card rates seem too high, you can always buy low-cost pre-paid cards with rates as low as five cents a minute.
  129. Save on cellular. Cellular phones are convenient, but they can really fracture family finances. If you keep one for emergencies, consider a much less expensive pager instead. If you really need cellular, understand what you need it for before you buy it. For example, why pay for an unlimited national calling plan if you rarely leave your state? If you don’t use all the minutes that come with your monthly plan, the cost of the minutes you do use skyrockets. So think about your needs before you sign a contract. And speaking of contracts, nowadays there are many plans that don’t require one. With rates and plans changing often, you’re a lot better off not being locked in.
  130. Free cellular phones aren’t free. Normally you’re better off getting a cheaper plan and buying your own cellular phone. Plans that include “free” phones often also come with long contracts and higher monthly costs.

    131. Education

  131. Money for nothing. Billions of dollars of grants, scholarships, work-study programs and low cost loans are available every year. Don’t pay a company to find them for you, because there are places you can search for free. The Internet is a great resource for this. Websites to check out include www.fastweb.com and www.finaid.org, but there are many others. Just do a search for “college scholarships.” You can also get lots of helpful advice from any college admissions office.
  132. FAFSA first. FAFSA stands for “free application for federal student aid,” and it’s basically a standardized form that will help you find out what kind and how much aid will be available to your student. Colleges and universities use it as a basis for the tuition packages they offer, and nearly every scholarship, work-study and other dispenser of student aid also uses it. Bottom line? If you’ve got a kid going to college, you’re going to need it, so fill it out as early as possible, especially since some grants are first come, first served. You can get the form from any college, or you can fill it out online www.fafsa.ed.gov.
  133. Beat the local bushes too. You can look at all the scholarship search websites and library books in the world and still miss college cash. Why? Because the $300 scholarship offered by your local Rotary Club isn’t in there. Neither is the local Elks club $250 essay contest or any number of other awards local civic, cultural and religious groups may be offering in your neighborhood. Individually, the local stuff may look like small potatoes. But free money is free money: someone’s got to get it; might as well be your student!
  134. Buy textbooks online, used or both. Used to be you were trapped paying outrageous prices to the monopoly known as the campus bookstore. Nowadays, thanks to the Internet, you can buy new and used textbooks online and save serious bucks. Do a search for “used text books.”

    135. Around the House

  135. Don’t buy drier softening sheets. Instead, mix up a spray bottle with half water and half fabric softener. Spray a washcloth with the mixture and toss it in the dryer.
  136. Repaint in white. Painting is one of the few home improvements you can make that normally add more value to a home than it costs, assuming you do it yourself. White paint is usually cheaper, doesn’t fade, makes rooms look bigger and goes with more stuff.
  137. Clean your own carpets. A carpet-cleaning machine is a great neighborhood co-op tool. Share the cost (maybe you can find one at a yard sale) with your neighbors and everybody on the block saves $100 a year or more in carpet cleaning costs.
  138. Do it yourself. If you own a home, buy how-to books and stop calling repairmen for everything!
  139. Charge it! Batteries that is. Reusable batteries cost more to buy, but can pay for themselves easily.
  140. Buy yesterday’s technology. One of the fundamental ways to save money is to buy yesterday’s technology. A Pentium 366 computer may not play Solitaire at the speed of light, but it will probably be perfectly adequate for the tasks normal people use computers for. And it will cost a fraction of the price of the newest, fastest models. Buying the latest greatest gadget is an expensive hobby. The same concept applies with everything from cars to bicycles to coffee makers.
  141. Stop being so darn clean! Americans can be obsessive when it comes to cleaning our clothes. Result? High dry-cleaning bills, high utility bills and high clothing bills. Nobody’s suggesting you should use body odor to cull your circle of friends, but the fact is that many items, especially the expensive-to-dry-clean-kind can often be worn more before we have them cleaned. Talk to a haberdasher and they’ll tell you that a quality men’s suit should be dry-cleaned as infrequently as possible for longer life. They’d rather see you brush them clean than exposing them to the trauma of a dry-cleaner.
  142. Use inexpensive decorating techniques. Sometimes you just need to change the look of a room. A new tablecloth can transform a dining room, and you’ll probably find one at the Salvation Army for $5. Plants are great decorations that you can get free by exchanging clippings with your friends. A plywood circle sitting on a round trash can look good when you cover it with a nice tablecloth, and the base doubles as storage. Old wooden chairs and boxes look cool when they’re repainted in funky colors. Bottom line? When it comes to decorating, an ounce of imagination will replace a pound of shopping!
  143. Freeze your scouring pads. They last longer that way.
  144. Save a tree or two. Use a clean hand towel in the kitchen instead of always reaching for paper towels.
  145. Plastic has a half-life of a million years. Wash and reuse plastic food storage bags.
  146. Foiled again. Aluminum foil can often be reused.
  147. Clean up on cleaners! You can often make your own cleaners that will save money and work just as well as their heavily advertised cousins. For example, combine ½ cup of ammonia, ½ cup vinegar and two tablespoons of cornstarch to a bucket of warm water and you’ll have a great window cleaner! And while you’re at it, use old newspaper to clean windows. Not only is it cheaper, it won’t streak. Baking soda does the same work as carpet deodorizer, scouring powder, and toilet bowl cleaner. It can even act as an antacid and a fire extinguisher. And how about vinegar? Combine it with salt, and it will clean your copper pots. It also polishes chrome, removes soap scum, and cleans your coffee maker. Cornstarch is more absorbent than talcum powder, and pure enough to use in place of baby powder. It can also clean carpet and remove grease stains.

    148. Pets

  148. Fido for free. Why would anyone pay a pet store for a furry friend when there are perfectly wonderful dogs and cats for free (or nearly free) at the Humane Society? Not only are you getting an inexpensive companion, you could be saving a life! But remember before you take one home that pets can be expensive. An average-sized dog can easily cost you $25 per month just in food alone.
  149. Shop your pet food. Unless your dog and cat read or watch a lot of TV, they probably won’t complain about getting generic food. Read the labels, and you’ll find that name brand pet food often has the exact ingredients at twice the price! Buying in bulk could also be a good idea, and don’t forget to try online shopping too. You might be able to save up to 50% at websites like www.petsmart.com, www.petquarters.com, www.planet-pets.com or www.petmarket.com.
  150. Make your own pet toys. Pets are like babies. They’re more likely to enjoy the box the toy came in than the toy itself. You’ve got plenty of interesting, entertaining and chewable items lying around the house already. You can grow catnip or find it cheap at herb stores.
  151. Use free or discounted pet services. Odds are you’re already paying taxes to subsidize some basic pet health services. Call your local Humane society or county facility and ask about discounted inoculations or other services.

    152. Babies

  152. Dump disposable diapers. Washing your own diapers can save you a couple of hundred dollars in a year and your landfill will be happier too!
  153. Make your own baby food. There are plenty of free recipes online and in library books for food that is better than name brand because it won’t have as much salt, sugar and preservatives. It’s also infinitely cheaper.
  154. Rent your baby clothes and supplies. Well, not actually rent perhaps, but practically. Buy your baby clothes, crib, stroller toys and other things at up to 75% off by shopping at consignment stores. When your baby outgrows them, consign them yourself and make part of your money back. You can even consign online: try www.kindercloset.com
  155. Keep abreast of the cost of formula. You can spend $1,500 a year on formula. Breastfeeding is free and according to many, healthier too.
  156. Make your own bibs. Cut the back and sleeves from an old kids T-shirt or sweat-shirt and you’re there. If you want to get fancy, stitch around the edges.

    157. Food and Grocery

  157. Use coupons. But only for things you’d buy anyway, not to check out new products. Organize your coupons by expiration date and check them each time before you go to the store.
  158. Shop once a week. Repeated trips to the grocery store cost you gas money and time, and subject you to more impulse-buy temptations. Keep your trips to a minimum.
  159. Bend to win. You may have never thought about the way a grocery store is laid out, but let me assure you, merchants have. Why do you think staples like milk, bread and eggs are normally separated and/or found in the back of the store? That’s so you’ll have to run a gauntlet of impulse buys to reach them. And speaking of reach, more expensive items are typically displayed at eye-level within easy reach. Stoop and bend to find lower cost-per-unit items.
  160. Weigh to go. While you’re in the produce section, use the handy scales to weigh pre-weighed bags of bulk produce. For example, if you’re buying a 10-pound bag of potatoes, weigh them. Some will be nine and a half pounds, some might be 10 and a half. Same price. Which would you rather buy?
  161. Bring your lunch from home. That alone can save you up to $1,000 per year.
  162. Buy in bulk. Often warehouse stores are great places to stock up on large quantities of nonperishable items at very low prices. However, be careful not to go in to buy a sack of dog food and walk out with a new TV.
  163. Go to food stores for food and hardware stores for hardware. Mega-stores that offer everything under the sun may be convenient, but you’ll often pay for it. Light bulbs are a lot cheaper at Home Depot than the grocery store.
  164. Repackage. Put small quantities of leftover sour cream or other perishables in smaller containers. They’ll last longer. Cookies, crackers and the like will also last longer if stored in glass jars.
  165. Grate savings. You’re probably paying from one third to twice as much to have someone else grate your cheese for you. You’ll also save by cutting up whole chickens, slicing your own pickles, slicing meat for cold cuts and using a blender or rolling pin to make your own bread crumbs. Compare per-unit prices on items like this and you’ll quickly see how much you’re paying for other people’s labor. (By the way, do you throw away your chicken giblets? Fry em up for Fido. A tail-wagging treat!)
  166. Starch savings. Fancy boil-in-bag or flavored rices routinely cost 10 times the amount of the old fashioned kind. All it takes to make rice is the ability to boil water! Bags of smaller potatoes are often half the cost per pound of big baking potatoes. Bake two little ones instead of one big one. Your stomach won’t notice.
  167. Protein savings. The simple proteins found in beans are better for you and obviously much cheaper than the complex ones in meat, fish and poultry. In other words, eat less meat!
  168. Pay attention. Always compare unit pricing, always consider generic products (which often come from the same factory anyway) and always try to avoid the word “convenience.” Pre-made and preprocessed foods are expensive and often not as good to the taste or the body. If it’s convenience you need, make your meals from scratch on Sunday and freeze them. Avoid fast food. It’s horrible for you, costs a ton of money and doesn’t taste that hot anyway.
  169. Milk your budget. Milk about to expire? Freeze it. You can thaw it out and use it later.
  170. Dialing for Dominos? Make your own Pizza. It’s cheaper.
  171. Don’t pop for Orville Redenbacher. Use generic popcorn with an air popper. It’s cheaper and better for you.
  172. Keep up the pressure. Pressure cookers cook in much less time and in many cases seal in nutrients.
  173. Something cheap that’s sweet to eat. Freeze fruit juice in small paper cups and add a spoon. Instant Popsicle!
  174. Freeze your flour. If you don’t use it often, put it in a plastic bag and keep it in the freezer. While you’re at it, chop up those leftover onions and put them in the freezer too. That way they won’t stink up the frig and you’ll always have chopped onions on hand. You can also freeze parsley, tomatoes, garlic and other things that might otherwise be rotting in that vegetable drawer.
  175. Butter up the cheese. Lightly buttering the edge of semi-hard cheese makes it less likely to form mold or dry out.
  176. Extend yourself. Adding cottage cheese to hamburger will enhance the flavor, add protein and allow you to increase servings from four to six per pound. And speaking of ground beef, buying that expensive extra lean beef isn’t necessary. As you broil your burgers most of the fat is burned off anyway.
  177. Don’t be individual. There is almost no situation where individual serving packages are as economical as larger containers. Buy big and divide the stuff into your own smaller storage containers.
  178. New life for old bread. Leftover bread and rolls can be toasted in a toaster oven and chopped up into croutons.
  179. A recipe for savings. Nobody will sue you if you alter your recipes a little. You can substitute cheaper veggies (sliced carrots) for more expensive ones (zucchini). You can probably slightly reduce the cheese or sugar in your baking without noticeably altering the taste. (Keep in mind that recipes often will “round up” ingredients to make them easier to measure.) When you read a recipe, look for ingredients that might just be included to enhance the color instead of taste and try eliminating them. There are ways of stretching just about everything. Make your cookies and muffins a bit smaller and make more of them. Add a little more water to your concentrated juice. Add extra potatoes, beans etc. to stretch casseroles and soups.
  180. Dress for salad success. Mix ½ cup of vinegar, 1 and ½ teaspoons of salt, ¼ teaspoon of pepper, ½ teaspoon of dry mustard, 1 minced garlic clove and one cup of salad oil. Delicious salad dressing at a fraction of the cost.
  181. Grow your own! Next time you buy fresh garlic, save the four inner cloves. Plant them about ½ inch deep. In less than six months, you’ll be in garlic city! There are many other herbs and vegetables that you can grow yourself.
  182. Don’t buy water. Paying for expensive water is further proof that enough advertising can make people do just about anything. If you really have concerns about water quality, buy one bottle of expensive water and a cheap water filter. Then you can make your own “bottled” water, pour it into your fancy bottle, look cool and save money.
  183. You are what you eat. Which would you rather be: an apple or a candy bar? One of the best things about saving on food is that what’s cheaper is often what’s better for you. Apples cost less than candy, are more filling and much better for you. Water is not only healthier than soda, it’s nearly free. Legumes are cheaper sources of protein than meat and better for you as well. Bottom line? Convert your junk food junkies into fruit freaks and you’ll not only save money on food, you’ll save it on healthcare as well.
  184. Be a migrant worker. If you live near an area that grows fruit or produce, go to a pick-it-yourself farm for bargain prices, fresh air and a reminder of why you work in town.
  185. Be vigilant. Barcode scanner rip-offs aren’t just possible, they’re common. Check your receipt before you leave the register.
  186. Creative leftovers. Nearly every meal ends up with a few odds and ends of vegetables and/or meats. Keep two lidded plastic containers in your freezer. After every meal, put the veggie bits in one and meat bits in another. You can then periodically sprinkle the bits of meat on your pizzas, or combine the two and make a great soup!
  187. Lettuce keep our lettuce longer. Wash your lettuce thoroughly, then go outside and swing it around in a pillowcase to get rid of the excess water (and to amuse your neighbors.) When you’re done, put it in an airtight container and it will last at least two weeks in your refrigerator.

    188. Travel

  188. Go off-season. You can save 10 to 60%. In general, the best travel deals will be found from November 1st to December 15th.
  189. Shop around. Airlines offer the most complicated fare structures ever devised. But the advantage is that there are often bargains to be found if you’re willing to look. The Internet can be a big help. Most major airlines now offer last minute seat auctions, so check the web sites of the ones that serve your city. Name-your-own price websites like www.priceline.com can also save you money, as can auction websites like www.ebay.com or www.skyauction.com. If you travel a lot, a membership site like www.bestfares.com can quickly pay for itself with hundreds of bargains on air, rental car and hotel discounts.
  190. Hotel high jinx. I never pay the asking price of hotels (well, unless everything in town is sold out.) Hotel rooms are like highly perishable food: if they’re not used that day, they’re wasted. You can almost always get a better deal just by asking, but do it with a nice smile face-to-face when you check in, or with friendly calls direct to the hotels you’re considering. It won’t work if you just call national 800 numbers, because they can’t negotiate. So call area hotels and pit them against one another. (”Gee, I’d rather stay at your place, but the Holiday Inn is $20 cheaper! Can’t you match their rate? Pretty please?”) If nothing else, you can often get a free room upgrade just by flashing a winning smile.
  191. Get hostel. A hostel is a budget traveler’s dream, especially if you’re the social type. A hostel is a cross between a dormitory and a hotel, and you can find them in most major cities in the world. Quality of accommodations vary widely, but you can often find a place to lay your head for as little as $5. Drawbacks? Sometimes you could end up in communal sleeping and bath arrangements, with boys segregated from girls. Others are more private; you have to call to find out the particulars. You can find current hostel guides at the local library, or check Internet sites like www.hostel.com.
  192. Bed and Breakfasts. These can sometimes save you money, but almost always offer more charm and personality than hotels. The more expensive the city you’re visiting, the more money you’re likely to save by staying at one. You can find B&B guides online at Internet sites like www.traveldata.com and at the library.
  193. Use consolidators. Hotel and airline consolidators can save you serious money, since they buy in bulk. You can often find them in the travel section of the Sunday paper, or by doing an Internet search. Drawback? They may not offer as much flexibility in flight times or hotel locations.
  194. Fly free! You can actually fly very inexpensively or even free if you’re willing to be a courier. A courier is someone who uses their luggage allowance to transport a package for a courier company. While it may sound a bit shady, it’s totally above-board, providing you’re working with a reputable company. You can find one by traveling to the Internet and going to www.courier.org or www.aircourier.org. You can routinely find deals like London for $100 round-trip or Mexico City for $50. But be aware, there are major catches. For example, it’s very rare for two people to be able to courier together on the same flight. In addition, you’ll often have a very limited time in the country you’re visiting. And the best deals are last minute ones. So courier flying is best for people who like to travel alone and are willing to fly anywhere at the drop of a hat.
  195. Use travel agents. These guys can often get good deals, especially if you’re in the market for a vacation package or cruise. When you plan a vacation, see what you can do on your own, but before you book, see if a local agent can beat the deal you found yourself.

    196. Entertainment

  196. Use coupons to eat out. You can probably find “entertainment” coupon books that will offer you buy-one, get-one-free meals, as well as other valuable coupons. Often the dry-cleaning coupons alone found in these books are enough to reimburse you for their $25 to $30 cost. But make sure if you buy one that you use it! You can also often find decent coupons in newspapers and city guides.
  197. Watch amateur sports. I don’t know about you, but I’d rather watch high school football, baseball, basketball or hockey than pro any day. The seats are better, the hotdogs are cheaper, and since the athletes aren’t quite as polished, the outcome of the games are less predictable and more exciting! If you do insist on pro sports, check the classifieds the week before a game. Season ticket holders unable to attend might be selling cheap.
  198. Go to happy hour. Learn what college students nationwide have known for decades. Go to a nice lounge that offers free happy hour food, nurse a drink, and chow down!
  199. Go to local events. Every week there is an amazing array of free or inexpensive things happening in most towns. Plays, concerts, dance, art exhibits, classes… the list goes on and on, and you’ll find it by calling your parks and recreation department, or looking in your local paper or city guide. Local colleges are another place to find great low or no-cost entertainment. See if you can get put on a few mailing lists.
  200. Lower your restaurant bills. There are simple things you can do to dramatically lower restaurant bills. For example, have appetizers at home to somewhat satisfy your appetite and then split an entrée at the restaurant. You’ll also be amazed at how much you can reduce your bill simply by skipping alcohol. Another idea is to have a romantic dinner at home, then go out for a nice dessert and coffee. Eat out during the week when you’re more likely to encounter specials.
  201. Go to the library! Why people spend so much money on books they read only once is one of life’s great mysteries. Is it because we need to fill our bookshelves with something? Anyway, if you haven’t been to the library lately, you’ll be amazed at just how entertaining it can be. Besides books, you’ll often find video, books on tape (great for long-distance driving), music, magazines and Internet access. Sometimes even computer software. It’s normally all free because you already paid for it through your taxes! There are two other great things about libraries that bowl me over, especially when you compare them to the mega-bookstores. One, it seems that there’s always someone friendly and helpful nearby. And two, it’s never crowded!
  202. Bag the paper and magazines. Most of us subscribe to things we don’t read. If you’re only going to read every third issue of that magazine, maybe you should cancel the subscription and either buy it at the newsstand when you want it, or read it at the library. And nowadays if you have Internet access, you can easily keep up with everything that’s happening on the planet instantly for free. If you really love the idea of curling up with the Sunday paper, see if you can get a Sunday-only subscription.
  203. Stop upgrading your software. If you have a computer, you might already know that software upgrading is one of the world’s great rip-offs. We already have word-processing and bookkeeping programs that have bells and whistles we’ll never understand, yet for some unknown reason we feel compelled to get the most recent upgrade. While it is possible that the latest and greatest version actually has a unique and timely feature, in my experience it’s not likely. If what you’ve got ain’t broke, don’t pay lots of dough to upgrade it. You should also check out free or low-cost shareware at places like www.cnet.com.
  204. Don’t pay for Internet access. At least try out one of many free Internet service providers. They only take a few minutes to set up and you’ll probably find the few annoying ads worth the $150 to $250 a year you’ll save. Some ideas: www.netzero.com, www.freei.net, www.altavista.com, www.bluelight.com and freeworld.excite.com.
  205. Use your imagination. Like saving money on so many other things, imagination is often a great substitute for currency when it comes to entertainment. When was the last time you went on a picnic? Tried out the swings at the local park? Parked your car at a scenic overlook? Went to the zoo? Went hiking? Camping? Played card or board games? There are a million ways we can entertain ourselves that involve spending little or no money. We just forgot what they were. But when you think about the most memorable and happiest times of your life, I’ll bet that they didn’t include paying a huge bill in a fancy restaurant or staying in an expensive hotel.

Recycling Old Electronics For Cash

 Posted on: Friday, August 22nd, 2008
Comments: 0

If you love to own the latest technology (or live with someone who does), chances are you have a stash of tech trash… old iPods, cell phone chargers, or maybe even a broken laptop infesting your closets. But before you throw your tech toys in the trash, why not see if you can get some cash back for them?

In 2005, according to the Environmental Protection Agency, Americans dumped more than 2 million tons of old technology in dump sites, but only 380,000 tons were recycled. Traditionally, tech devices have been especially bad for the environment, leaving behind a hodgepodge of chemicals from mercury to lead.

Fortunately, companies are cropping up that specialize in recycling all this old technology. Escrap, one such recycler, pays businesses for their old electronics. While it’s not much, the money comes with an added bonus… feeling good about helping the environment.

Not a business? Don’t worry, you do have options.

Gazelle.com, a web site owned by a company called Second Rotation, allows you to quickly plug in the device you’d like to recycle, answer a few questions about its condition, and instantly receive an offer for the device. Mail it in to Gazelle and they’ll send you back a check, deposit money into a PayPal account, or even donate the cash directly to a charity of your choosing. So now there’s no excuse to simply throw away your old electronics.

But, depending on the device, you may receive more for your old tech with a tax receipt than a sale. Earth911.org maintains a list of organizations that recycle items for charitable causes. Just make sure to shop around, and you’ll be sure to get the most from your old electronics.

Insurance for Kids?

 Posted on: Tuesday, August 19th, 2008
Comments: 0

Q: I agree with a majority of the story but I do not agree with you saying not to buy insurance for your kids. Yes, I do believe that you don’t need a lot of insurance for your kids but some is good idea. $50,000 to cover final medical expenses and funeral cost also If my child passed away I don’t think I would be going right back to work any time soon. With the average funeral costing between $8,000-$12,000 you cant tell me that paying a few dollars a month is a bad idea? Please let me know what you think?

Thanks,

R

A: Hi R,

I’ve gotten a whole bunch of mail on this topic, much of which agrees with you: that buying insurance on kids is a good idea. While I’ll stick to my guns on this and say that I still don’t think it’s the best use of savings, I will concede that a few bucks a month (or even year in some cases) isn’t going to hurt anything, and if it gives you added peace of mind, then you should do it.

Thanks for writing and for watching!

Stacy

Making Your Life Less “Taxing”

 Posted on: Tuesday, August 12th, 2008
Comments: 0

Over the years a few brave souls have actually tried to tackle our tax laws for the express purpose of making them simpler and therefore fairer. Back in 1998 I did TV news stories about a couple of proposals then on the drawing board. The first was a proposal for a flat tax, proposed by Congressmen Dick Armey and Richard Shelby. Under this proposal, our entire tax code would have been shredded and replaced with a simple tax of 17% of income. No deductions, no credits, no exceptions. You’d get a big personal exemption, but every dime you made after that would have been taxed. For a family of four, for example, the exemption would have meant that only income above $33,800 would have been taxed, but everything beyond that exemption would have been taxed at 17%. The major selling point of this proposal was that everyone in America would have been able to file his or her taxes on one side of a post card.

Let’s begin our discussion of income taxes with synonyms for the word “complex,” courtesy of the Webster’s Collegiate Thesaurus.

COMPLEX: Byzantine, daedal, elaborate, U.S. income tax laws, Gordian, intricate, involved, knotty, labyrinthine, sophisticated.

OK, so I took a little literary license by adding “U.S. income tax laws” to the synonyms for “complex.” But whether Webster cops to it or not, the U.S. tax code is practically a synonym for complex. The complete Internal Revenue Code contains more than 2.8 million words. Printed 60 lines to the page, it would fill almost 6000 letter-size pages. That’s a ridiculously complicated way to express a brutally simple concept, namely that Uncle Sam wants to share in the spoils of your success.

Over the years a few brave souls have actually tried to tackle our tax laws for the express purpose of making them simpler and therefore fairer. Back in 1998 I did TV news stories about a couple of proposals then on the drawing board. The first was a proposal for a flat tax, proposed by Congressmen Dick Armey and Richard Shelby. Under this proposal, our entire tax code would have been shredded and replaced with a simple tax of 17% of income. No deductions, no credits, no exceptions. You’d get a big personal exemption, but every dime you made after that would have been taxed. For a family of four, for example, the exemption would have meant that only income above $33,800 would have been taxed, but everything beyond that exemption would have been taxed at 17%.The major selling point of this proposal was that everyone in America would have been able to file his or her taxes on one side of a post card. Proponents of the flat tax claimed that it would result in savings of $100 billion a year in IRS expenses alone. Those opposed said that a 17% rate wouldn’t be enough, claiming that it would take a rate of more like 22% to keep the red, white and blue in the black.

Also in 1998, Congressmen Billy Tauzin and Dan Schafer proposed an even simpler plan. They wanted to do away with income taxes altogether and replace them with a national sales tax. This plan had some real pizzazz since it repealed all personal taxes, corporate taxes, inheritance taxes and gift taxes. Better yet, it suggested completely dissolving the IRS by the year 2001. And it was very simple: income tax was to be replaced with a 15% sales tax on all retail purchases of goods and services. Sounded good, at least until you looked under the hood. Because while a national sales tax replaced all income taxes, it didn’t replace Social Security, other employment taxes or state or local income taxes. And when they said the tax applied to all goods and services, the key word was “all.” Houses, cars…everything. The final straw was that even with that onerous additional burden, some experts said that 15% wouldn’t be enough. It would take more like a tax of between 17% to 37% to make the system work. Try adding that on top of a new house.

While neither of these ideas ever made it to second base, at least the thought was good. The tax code doesn’t need to be complicated to accomplish its mission. If you can put a man on the moon, you should be able to separate a citizen from their money with less than 2.8 million words. So why are taxes so complicated?

Let’s turn again to Webster:

PORK: government money, jobs, or favors used by politicians as patronage

Many of the wrinkles in the tax laws are there because some special interest benefits from them. I also believe that another reason our taxes are kept so complicated is the same as why investing is made to appear complicated. Namely, because lots of people make lots of money with the current system. As with investing, there are thriving industries built around interpreting tax laws and offering paid guidance to the less informed multitude. But as with investing, we can pull aside the curtain, blow away the smoke and break the mirrors. Because the truth is that very few of those 2.8 million words apply to your situation, and you don’t need expert help, especially now that personal computers are on the scene.

That being said, you do need to understand the broad strokes when it comes to income taxes, or more specifically, reducing your income taxes. When it comes to taxes, a 60-minute money manager invests a few minutes a year on strategy, then hits the sofa, leaving the details for their computer.

Even if you know next to nothing about income taxes, you probably do know that the taxes that you pay in April are a result of money made and spent the preceding calendar year. This is factor one in determining how much income tax you’ll pay. You probably also know that the more income you report, the more taxes you pay. This is factor two. Finally, you’re most likely aware that you’re allowed to reduce your income by subtracting certain allowable expenses, called deductions. This is factor three in determining your personal tax burden. So if you understand these three factors, you’re already 90% of the way to becoming an effective tax planner. Because the term “tax planning” is really nothing more than a fancy phrase describing the process of reporting as little taxable income as possible and reporting as many tax deductions as possible. No big deal.

The first broad stroke you’ll want to master is exactly what the heck tax brackets are all about.

While you may think that tax brackets are hardware used to hold up tax shelves, guess again. Tax brackets describe what percentage of the money we make Uncle Sam expects to receive. Our tax brackets are called progressive or incremental. That’s because the more you make, the higher your rate. Note that I’m not saying the more you make the more you pay, although that’s also true. I’m saying that as you make more money, the incremental money you make is taxed at a higher rate. This concept becomes clear when you look at projected tax tables for 2003.

Married Filing Jointly

2003 Taxable Income

Tax Rate

$0-$12,000

10%

$12,000-$47,450

15%

$47,450-$114,650

27%

$114,650-$174,700

30%

$174,700-$311,950

35%

$311,950

38.6%

 

Single Tax Payers

2003 Taxable Income

Tax Rate

$0-$6,000

10%

$6,000-$28,400

15%

$28,400-$68,800

27%

$68,800-$143,500

30%

$143,500-311,950

35%

$311,950

38.6%

There are additional tax tables reflecting other categories of tax filers, like married people filing separate returns and heads of household (translation: unmarried with children). But since we’re only trying to grasp a concept or two, let’s stick with the two most common: joint filers and single filers. A glimpse at the tables reveals what a progressive tax structure is all about. Looking at the table for single taxpayers, we see that in 2003, if you made $6,000 or less, you were in the 10% tax bracket. If you made more than $6,000 but less than $28,401, you were in the 15% tax bracket. And if you made more than $311,950, you’re paying 38.6%.

Before we go on, let’s make sure we understand what we’re looking at. The term “taxable income” in the tables doesn’t refer to every dime you made. That would be your total income, your gross income, or simply your income. Taxable income, on the other hand, is what’s left after all your deductions and exemptions. (Pull out your most recent 1040 and you’ll see this amount somewhere around line number 40. You’ll be able to identify taxable income because it will be labeled “taxable income.”) So theoretically you could have an income of a million dollars, but if you have $994,000 worth of exemptions and deductions, you’d still be in the 10% tax bracket.

Now let’s revisit the term “progressive.” Remember, I said that the more you make, the higher rate you pay? Here we see it in action. Look again at the table for single taxpayers. The first $6,000 of taxable income is going to be taxed at 10%. So if that’s all you made, you’d owe $600, you’d be in the 10% tax bracket and that would be that. But say your taxable income was $25,000. Our table tells us that the first six grand is taxed at 10%, then the rest, $19,000, will be taxed at the next highest bracket, which is 15%. Our tax bill would be $6,000 x 10% + $19,000 x 15%. Total tax due? $3,450, which is a little less than 14% of our $25,000 taxable income. So, while we’re in the 25% tax bracket, we’re not paying 25% of everything we make in taxes. If our taxable income is $50,000, our total tax bill will be $9,792. We’re in the 27% tax bracket, and we’re paying a little less than 20% of our total taxable income in taxes.

I’m sorry to drag you through Tax Accounting 101, but I want you to understand what tax brackets are and what they’re not. What they are is a picture of how your incremental income (i.e., income after it crosses a certain threshold) is going to be taxed. What they’re not is a picture of how your total taxable income is going to be taxed.

There are many ways that you can use information about what tax bracket you’re in to potentially lower the amount of tax you pay. For example, suppose you’re single and it’s December 27th. You’ve got a $1,000 profit in a mutual fund and you’re thinking of selling. Should you sell it now or wait till January first? Based on how much money you’ve made this year and the amount of deductions you expect to have (information instantly available from your personal finance software program) you determine that your taxable income this year is going to be $28,400. This is exactly where the 27% tax bracket begins, which means that if you add to your income by making an additional $1,000, you’re going to owe $270 in taxes on that $1,000. If, however, you expect that next year you’ll only make $25,000, you could sell the mutual fund after January 1st and only pay an additional $150, since $1,000 on top of $25,000 still leaves you well within the 15% bracket. So waiting a few days will save you $120, not to mention postponing the tax bill for an entire year.

That’s one way that tax brackets can help you save tax dollars. Another is in an area we’ve already discussed: buying investments that offer tax-free income. Tax-free interest is obviously worth a lot more to someone in the 38.6% federal tax bracket than to someone in the 10% bracket. You can’t compare tax-free investments with their taxable cousins until you know what tax bracket you’re in.

I don’t know about you, but I’m now officially sick of talking tax brackets. It’s high time we talked timing.

Keep in mind that the vast majority of us are not only calendar year taxpayers, we’re also cash basis taxpayers. That means that income becomes taxable when you receive it and allowable expenses become deductions when you pay them. As you’ll soon see, this is a key ingredient when it comes to reducing income, increasing deductions and shrinking tax bills.

Let’s focus on reducing taxable income first, since that’s the factor that presents the fewest options and therefore takes the least effort to understand.

If you’re an employee, you don’t have to spend a lot of time on your employment income, because you have virtually no control over when you receive it. If your employer writes you a check on December 30th, it’s still reportable income for that year, even if you wait till January 1st to cash the check. While you may not have actually received your cash until the next year, it was theoretically receivable in the current year, so not cashing checks won’t reduce your taxable income. But suppose you have a year-end bonus coming to you? If you can persuade your boss to cut that check after January 1st, you will have effectively postponed the taxes due on that income for an entire year. The only problem with this approach is that convincing your boss to delay a check won’t be easy, since your taxable income is your company’s deductible expense. So if your company is also on a calendar tax year, postponing your income means postponing their write-off. An idea they probably won’t squeal with delight over.

Those of us who are self-employed often have more flexibility when it comes to the timing of our income (which, by the way, is one of many good reasons to be self-employed). If you’re a consultant, you can choose to send the invoice for work you did on December 30th out on January 1st. Even if your customer pays you instantly, (as if, right?) you’ve still moved that income to the next tax year. Congratulations: you’re an income-shifting tax planner!

While your pay is most likely your largest source of income, it’s probably not your only source. You could be getting gifts, borrowing money, collecting interest, selling stuff, winning money from gambling or contests, getting alimony, receiving child support, collecting Social Security (or other retirement income) or getting rent checks from real estate. How does each of these sources of cash affect your tax picture?

Getting Gifts

When you get money as a gift, you’ve got nothing to report to the IRS. Gifts aren’t taxable income. So, if you can arrange it, my advice would be to receive all your money this way. In addition, this method of paying the bills will also significantly reduce the time you now spend working for a living. In my experience, however, the only people who consistently manage to receive significant portions of their income this way resemble Mae West (wink, wink). But if you do find a way to accomplish this without the Mae West approach, please forward this information to me ASAP.

Borrowing Money

Borrowing money also results in no requirement to report taxable income, because borrowed money is only yours temporarily, and is therefore not considered income for tax purposes. Despite this tax advantage, however, I would stringently advise against this method of making ends meet.

Collecting Interest

Interest income is just like your salary: totally taxable in the year it is either received or receivable. So when it comes to being able to shift your taxable interest around to try to influence the amount you’re reporting in any given year, good luck. In this respect, interest is basically like your salary; you have no control over when it’s paid. The only possible exception is the interest from a debt that’s owed to you in the form of a personal or real estate loan. Then you might be able to exert some influence on the person who owes you the interest by pleading with or coercing them to pay it in a fashion that would move the interest from one tax year to another. But by and large, your interest income isn’t much more flexible timing-wise than your salary. Unless that interest comes from a tax-advantaged source.

The main source of tax-advantaged interest we’ve already discussed: tax-free interest from various types of government bonds. You’ll recall that interest arising from state or local government bonds (i.e., municipal bonds) is normally federally tax exempt. Interest from federal obligations (i.e., treasury bonds) is exempt from state and local taxes. And the interest from bonds issued within the state where you live (i.e., local municipal bonds) is the best deal of all, because that can be completely tax-free: federal, state and local. But as you’ll also recall, the problem with these sources of tax-free interest is that the tax advantages are usually off-set by lower interest rates, so what you gain by not paying taxes on these sources of interest you lose by not getting as much interest to begin with. Since that’s not always true, however, you should periodically check the rates available on tax-free bonds and mutual funds, especially if you live in high-tax states like New York or California. And, as we just discovered in our discussion about tax brackets, you should also see what your tax bracket is. Once armed with this information, you’re ready for a quick computation. Remember the formula? Taxable rate times reciprocal of tax bracket = equivalent tax-free rate. Here’s an example:

Taxable Rate (for example, the rate available on a medium term bond fund) = 5%

Reciprocal of Tax Bracket (if I’m in a 30% tax bracket, the reciprocal is 1 minus .3) = .7%

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