Sushi Money

That depends upon what you’re looking for of course.  Lets assume an individual’s overall debt situation is well under control, and their credit card debt, if not paid off monthly, is mild.  If an individual is trying to stay away from all market risk, and wants to keep cash readily available for a near-term use, then “safety” is defined by your need for the money, for a purpose close at hand.  

Having an “emergency fund” is important for unforeseen situations… the time you really need money for something.  Most advocates say 3-6 months savings in the amount of your monthly income needs should fit that bill.  I think 6 months is more appropriate, and should be a first priority, especially in a family. So bank savings, money market accounts and CDs will fit the bill (CDs for savings, not an emergency fund due to possible penalties upon early withdrawal… e.g. you need the money).   Next is the credit card situation… pay down the credit cards!   

But what about longer term?  Is a safe bank/money market account or CD really helping over time?  Aside from peace of mind for knowing the money is there if needed, it may not be a safe place to keep funds.  Why?  Walter Updegrave from CNN Money writes a nice overview on why stockpiling cash may be a bad idea in a recent article “A lot of cash- too much risk.”  In essence he shows how the bite of inflation can slow the interest rate growth of bank savings (or CD or money market accounts) to a crawl.  That just doesn’t provide the necessary growth for someone trying to save for retirement or some other longer-term goal.  Mr. Updegrave shows the better alternative of really using a 401(k), if you have one, to grow retirement funds.  

I can think of few reasons why someone should not take advantage of 401(k) opportunities.  Most of those reasons involve hassles with paperwork, or how long one expects to be with a certain company, etc, etc.  But most 401(k) plans offer amazing benefits, and can be portable to take to a new employer.  Best of all, most 401(k) plans offer some kind of attractive matching or other benefit to how much you countribute… why pass up free money?    If you don’t have one, or just don’t want to use it… start an IRA.  We all need some kind of tax-deferred savings vechicle.  There is no better way to build retirement funds over time than a long-term tax-deferred approach to savings.  What if that just doesn’t meet your goals and need?  Maybe it can for a part of your savings program, and you can still use bank savings, money market and CDs for another portion.  You don’t like stocks or mutual funds?  Historically they provide the best long-term growth opportunities.  What about U.S. Savings Bonds?  They can provide a safe investment with a decent return, and can be used to fund education needs for children at a later time. 

The point is that there are many opportunities to grow your money over time… the earlier we start, the better off we are in later years.  I had a water-softener installed a couple weeks ago.  I didn’t plan on making a large appliance purchase this month, but the old water-softener finally gave in.  We live on well-water, and a good water-softener is essential.  Good reason for having an emergency fund… but more interesting was the conversation with the installer.  Here’s a guy in his middle forties that has a construction business on the side.  He was an energetic guy with lots of ideas and a strong work ethic.  He built his own house, had no debt, purchased only used cars, and was helping his children pay for school.  What about his retirement needs?  He had over $100,000 in savings.  Where was it?  In the bank, in a passbook savings account.

 This hard-working family man had never invested, never started an IRA, never looked at stocks or mutual funds, and was not comfortable with anything but cash at hand.  He was proud of his financial accomplishments, and should be… but he was also taking on a lot of “risk” in terms of the long-term safety of the growth of his money over time.  He also didn’t have any life or disability insurance beyond what social security might provide, and a family member to run the business in case of his disability.  Lots more there to be concerned about.  He knew he needed to start some savings and investment programs that would give him a leg up on inflation, but he was very risk averse.   We talked about some options and I referred him to a Certified Financial Planner to help get started.  He didn’t seem inclined to really want to do more however.  I wished him well… and hope he looks at other options.  It’s never too late to start!

Not yet! We were really due for this correction.   But I’m looking at sectors and how much exposure I have. How far will it go?  Great question, and one we’ll be reading about in the days ahead.  I won’t prognosticate that far… Stay tuned for all the “I told you so” comments, and some doom and gloom from the bear side.   If history is a guide, the commentary will become increasingly negative.  In the past few days there were several new articles with leads calling the market topped and way overvalued.  Just now I was watching the DOW drop slowly past 200 to over 400 points, then a super quick slide to over 500 points down.  Wow…  now just 10 minutes later it’s back “up” a little at “only” 393″ points down.  It’ll go more… watch the volatility.  That being said, I’m not a buyer here.  I’m pretty much 45% equities, 45% fixed-income, with some cash on the side.  I really like balanced and equity-income funds within an IRA… let them do their stuff.  Where else can you put your money right now?  A good money market fund at 4-5% is nothing to sneeze at.  Several internet banks have great rates in the 4-5% range as well.  I also like IEF… I-Shares Lehman 7-10 year Intermediate Treasuries.  It’s an ETF that trades on the AMEX, pays monthly and is a nice foundation for my portfolio.  I don’t plan to trade it near-term, but watch interest rates over time and see how it does. 

OBTW… eating poorly prepared Fugu is a really bad idea.  I love sushi, but I’ll keep my risk in the market!

Binary Dollar is hosting the 89th Carnival of Personal Finance this week.   Super idea for the theme using celebrity pictures for each topic and article… how appropriate for Academy Awards week!   The Carnival of Personal Finance originated at the site by the same name… with weekly carnivals around the blogosphere on a myriad of personal finance topics- terrific and useful information out there.  Our submission is the post “Supercharge your IRA for 2007” and I’m please to be part.  Great job Henry and Matt!

Oh… “What the heck is a blog carnival” you ask?!   Well, a blog carnival is simply that- a festive blogging and reading experience!  But it offers much more- truly a collaborative writing effort where bloggers and sites with a similar focus host a “carnival” of content periodically.  The blog carnivals are a nice way to gather theme-oriented content in a single reading experience, with creative layout and links to other blogs and information.  Enjoy!  

Many people are unaware that simply giving money to someone can result in a potentially taxable gift.  Sure people give money to others every day but for a sizable gift, cash or otherwise, the IRS has formal guidelines for the transfer of wealth in society.  Doesn’t sound fair sometimes, but if no one had to pay taxes when moving money around, that’s probably all there would be! Elaborate schemes to hide and shelter money, resulting in a system of taxation that was crazy.  Wait a minute… that sounds like what we have today!  Yes, but for gifts it’s a little different and we do need to abide by the law.  In many cases there are choices to be made… if not considered carefully we may owe far more taxes on gifts than realized. 

Let’s say you win a $1,000,000 lotto, and you decide you want each of your other 4 siblings to have $200,000.  You’ve been waiting for this day… so what do you do?  Walk to the lotto office, smile for the cameras and hold up that big check?  Then give each of your siblings the money?  That’s very nice of you… and for 2007 the IRS will thank you as well when you pay up to $50,960 gift tax on each of those $200,000 gifts!  That would effectively mean you paid $203,840 in taxes out of the original $1,000,000, leaving you to divide up $796,160.  Subtracting your own $200,000, you would only have $596,160 to divide up among your four siblings, each receiving $149,040 .  Not bad you say… which is true, but I would rather have the original $200,000!  What’s the better strategy?  Well, perhaps there’s not a formal guideline- but I talked about this with a few other people, and if it were me I would contact my siblings personally, and have them pay for the portion of the lotto tickets I purchased.  Then we could all walk down to that lotto office together and have the State or Lotto Agency write seperate checks for each of us!  No gift taxes would be due and we would each have the original $200,000.  Just an example to consider, and maybe not legal or even ethical depending on the circumstances. 

Giving money to others is a generous and charitable thing to do… but doing so may have unforeseen tax ramifications. More appropriate to most of us, for 2007 the current annual gift exclusion is $12,000.  If you want to give your four kids each $12,000- so be it.  You want to give your neighbor $12,000… that’s fine.  There is a lifetime gift limit of $1,000,000 to consider, after which gift taxes may be due.  Even if no gift taxes are due, when giving cash in excess of the annual gift tax exclusion amount you may be required to file a gift tax return.  Maybe not a factor for most of us, but definitely a consideration for estate planning and the wealthy.  If I did get $1,000,000 from the lotto individually, I would be sure not to give more than $12,000, or the annual exclusion amount, to each person each year!  But there is certainly a ”tax bite” that can occur without prior thought.  Any time someone “comes into money” it would be wise to sit down with an objective professional such as a Certified Financial Planner or CPA to discuss options.  

 Regardless of how we give, there are also beneficial tax considerations when making donations.  There may be valid, legal deductions available that can lower the taxes you must pay on your income each year.  And for larger donations of cash or valuable property, there are limitations on the deductibility of such gifts based on your income.  It is also important to note that unless you are making donations to qualified charitable organizations or non-profit entities, you may be making a gift that will incur taxes- money you must pay to the IRS based on the size of your gift.  It’s a good idea to speak with your tax planner or CPA to make an informed decision benefiting both the charity and your potential tax liability.  For general information, check out these useful links on taxes and charitable giving:

• A short overview on tax considerations is discussed in The Tax Perks of Charitable Giving from SmartMoney.com. 
• Fairmark’s Tax Guide has an excellent multi-page overview of the Tax Rules for Gifts.
• For those who may make larger cash donations and have trust or estate planning concerns, T. Rowe Price has an overview of The Tax Value of Charitable Giving.

So what isn’t taxable regarding gifts?  What does the IRS say it’s okay to give to others without concern for taxation?  Quite simply, medical and education costs, and gifts to your married spouse (there is currently an unlimited lifetime gift exclusion within a marriage), or to a qualified charity (there is also an unlimited lifetime gift tax exclusion on gifts to qualified charities).  You can pay for anyone’s medical care, without fear of taxation, as long as you pay directly to the medical institution for those health care costs.  Likewise, you can pay tuition costs for anyone as long as you pay the money directly to the educational institution.  If you give the money to the individual to pay for it themselves?  Then it’s a “gift” with potential tax consequences.  So there are many considerations and tax ramifications to “giving” money, or property, away.  Do you want to give your house to a family member?  That may be a gift… Do you want to give your car away?  Again, a gift…  When in doubt, always see a professional for discussing specifics about your situation!

• For detailed tax regulation information, see the most current IRS guidelines found in IRS Publication 526 (pdf file).

Most consumers hate paying ATM fees, especially if you are withdrawing money from an ATM machine that is not part of your own bank.   I usually see fees in the range of $1.50 to $2.00, but today I stopped by a local, small-town bank where it says, “Our main goal is to provide superior service that meets- and exceeds- your expectations.”  Well, they exceeded my expectations alright, especially when they wanted to charge me $3.00 to use their ATM!  Okay, I wasn’t one of their customers… but the reason I was withdrawing money was so I could walk inside and open an account.  Needless to say, their other fees were also excessive and I walked back out the door.  This wasn’t a branch of a national bank- just a small town bank in Missouri that for years has had the reputation of taking care of customers.  Perhaps they still do, yet now charge high fees as well. To their credit, they offer very competitive CD rates, which is apparently their focus point.  But I was disappointed to say the least.  Charging $3.00 for a non-customer to use their ATM more resembles the independent “let’s stick an ATM anywhere” businesses.   You can almost understand the reason for higher ATM fees with that business model, but I haven’t even seen a $3.00 fee at one of those machines yet!

I tried to find some national statistics on ATM fees, but found nothing specific after a short search.  Generally it seems $2.00-$2.50 is the highest most people see across the U.S.  Perhaps $3.00 may even be common in several major cities… but rural, small-town Missouri?  Some banks will tell you they charge the fees because of “network access charges” or that your other bank is charging them…. Not so fast.  In my case, I called my primary bank and they verified they do not charge other banks or institutions fees for a customer to use an ATM card or access their account.  I’m all for paying for quality service, at a fair price.  In this case, they are not offering either. 

Piggybacking on my earlier post, Yahoo’s Personal Finance has a syndicated article titled Steer Clear of Tax Cons written by Dayana Yochim that shows the pitfalls of “instant refund” tax programs, among others.  The article provides a great summary of why it’s not a good idea to use these services for most people.  Sure, there are legitimate business that provide a service- and for many people it’s fast, simple and effective.  But you are paying far too much for this service!  Why not do it yourself instead?  I’ve been doing taxes myself for many years with helpful programs like TurboTax from Intuit.  Instead of paying commissions and fees to someone else- spend the money on some basic tax software for your home computer! (Or you can do it online as well). It will probably cost less overall, and will provide an excellent tool to gain knowledge and a true picture of your tax situation.  Most taxpayers do not have complicated financial lives, or tax situations.  Do-it-yourself tax software is easy to use, and provides a year-to-year historical record as you use the software over time.  I’ve been doing this for over 15 years.  In some ways, I find the tax software applications almost “too easy” because it takes so much of the work out of it.  There are many valid reasons to use a professional tax-preparer such as a CPA of course.  Time, complicated financials or business issues may be more than you want to tackle personally- and that is understandable.  But most of the “instant refund” tax services are not professional tax services, and most taxpayers do not need expensive professional consultation.  There are several excellent tax software applications- do a Google search and you’ll find one to meet your needs.  Filing is simple and quick- and you can get your refund in days. It’s an invaluable tool and time saver… it really is not difficult.  Anything that makes my life simpler and more productive is a good thing!

There are so many websites and information devoted to personal finance that it becomes confusing at times.  We end up using what works best for us.  Planning for our future is becoming ever more important, especially with the aging of the Boomer population over the next 15-20 years.  It seems we can never know enough, and laws change every year requiring a pragmatic approach to keeping abreast of the changes.  One of my favorite sites is Yahoo Finance.  It offers so much information and flexibility.  The Yahoo Personal Finance pages are very useful for issues the average consumer can really use.  The content integrated to the site is excellent- and leads to many other resources. Empower yourself with the free tools out there- it’s never too late to begin planning ahead!