Daily Note

Sunday, March 22, 2009

Lighting the Way

This is the fourth of a five-part series about the “stages” of personal finance. First, I described the zeroth stage of money management, in which I was fumbling in the dark, spending compulsively and accumulating debt. Next, I described the first stage, in which I finally saw the light and began to repay my debt. Last week, I shared the the light at the end of the tunnel: what happened after my debt was gone and I began to save. Today, I share the current state of my personal finances as I begin to explore the third stage of personal finance.

In February, I wrote that I was entering the third stage of personal finance. The first stage, I said, had involved repaying my debt and learning to control my spending. The second stage focused on building savings and developing smart money habits. Now that I had mastered these two steps, I wondered aloud what came next.

Several readers quickly noted something I had forgotten: The ultimate goal — the eventual fourth stage of money management — is Financial Independence, the condition of having saved enough money that you can do whatever you choose. When you reach Financial Independence, it doesn’t matter whether or not you elect to keep working — you have enough saved and invested to follow your dreams.

Once I remembered that my ultimate goal was Financial Independence, the purpose of the third stage became clear to me: it’s the long, slow process of utilizing everything I’ve learned in order to enjoy life while building wealth so that I am truly financially free.

My plan
Although I now know my destination, I’m still a little in the dark about the journey. All I know is that what I’ve been doing seems to work, so I’ll continue down this path. Here’s my current roadmap:

Kris and I have refinanced our mortgage, and we continue to make accelerated payments on it. We’ve weighed the arguments for and against this, and have concluded that for our circumstances and our goals, we want the house paid off as soon as possible.
I’m continuing to contribute to my retirement as much as I possibly can. It’s my top priority, and as soon as I’ve paid my taxes, I’ll bring my contributions up to date for the year.
I use credit, but I use it responsibly. I never buy anything for which I could not pay cash. I don’t buy frivolous things with credit. I pay my credit card in full every month.
When I spend, I spend consciously. I’ve learned to prioritize things. Television isn’t important to me, so I don’t pay for a deluxe cable package. Instead, I use that money to fund my comic book habit. Making choices like this is the heart of frugality: spending on the things that are important while cutting back on the things that aren’t.
I’m saving for my Mini Cooper. I still haven’t decided whether I’ll buy new or used (again, I know the arguments for both choices), but I do know that I’ll pay cash when I purchase it.
At the urging of several GRS readers, I’ve begun to explore charitable contributions. I was not raised with an ethic of giving, so the notion is difficult for me to embrace. But it’s something I’m trying to explore. I find myself more interested in personally providing financial education, though. I feel like this is Good Work over which I have more control
I continue to manage my business. That’s right: Get Rich Slowly really is a business, and as a result I have many business decisions to make. How can I increase my income? Which advertisers should I accept? Do I lease an office so that I can separate work from home? What about hiring an employee to help me with research and e-mail? I think about all of these things and more.
I find that I’m much more interested in the stories of others who have been successful. It took me a while to get comfortable with the notion, but now I love to take people to lunch to pick their brains. One thing that’s intriguing about the third stage of money management is that concepts and skills that used to seem hopelessly out of reach now seem like distinct possibilities.
And, of course, I’m allowing myself a budget for fun. During the first two stages, I tightened the screws on my spending. I pinched pennies. I haven’t become a spendthrift by any means, but I now allow myself a certain amount for “wants”. I don’t come close to spending what I set aside for this, but that’s fine. Just knowing that it’s there, that I’ve given myself 30% of my income to spend on things that bring me joy allows me to not feel guilty for indulgences. I know that I can afford them.

These are the things I’m doing now, but there are others I’d like to do in order to help me along the path to Financial Independence.

For one, I plan to learn more about investing. Right now, I’m putting my money in index funds. But over the next year I plan to spend a lot of time reading books and speaking with smart people, trying to discover other options. It may be that I decide index funds are the best choice for me. I want to explore my options, though, to see what else is out there.

What next?
So, to answer my own question, “what next?” is more of the same. It’s difficult to argue with this steady progress that I’ve made. I’m willing to continue down this path for many years to come.

I feel extraordinarily fortunate to be in this position. Just five years ago, I was deep in debt and struggling. Today I am debt-free (except for the mortgage), have a job that I love, and make a good income. I’ve learned to curb my urge to own things, and have even purged some of the stuff I bought before. I have a great wife, a great life, and a great future.

I do not yet have Financial Independence, and I may never reach that goal. That’s okay. I’m grateful just to have reached this third stage of personal finance.

Note: This series is intentionally less “polished” than most articles at Get Rich Slowly. It’s a chance for me to think out loud, to explore the stages of personal finance with you, the readers.

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Saturday, March 21, 2009

Details For Toxic Asset Plan On The Way

The Obama administration has developed a detailed plan for removing toxic mortgage-backed securities from the nation’s banks and financial institutions and may unveil it early next week.

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Friday, March 20, 2009

Am I Required to Report All Income to the IRS?

In general, if you have to ask whether you need to report certain income to the IRS, the most likely answer is, “Yes.” Here are some examples, courtesy of MSN Money.

Q. I hosted a party to sell products to my friends (and use my social circle for multilevel marketing from some corporation), and the company’s representatives brought me gifts. Do I have to report this?

A. Yes.

If you host a party at which sales are made, any gift you receive for giving the party is a payment for helping a direct seller make sales. You must report it as income at its fair market value.

See Publication 463.

Q. My sugar-daddy (er… loving husband) died and I had to pay to collect the reward (er… life insurance). Do I have to report this?

A. Yes.

Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract.

Q. This year, I’ve been taking bribes to keep the caviar smuggling ring off the FBI radar. Do I have to report this?

A. Yes.

If you receive a bribe, include it in your income.

Q. I ran for office this year and used campaign contributions to pay for my second cousin’s bodyguards and my daughter’s wardrobe. Do I have to report this?

A. Yes.

These contributions are not income to a candidate unless they are diverted to his or her personal use. To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns… Excess campaign funds transferred to an office account must be included in the officeholder’s income on Form 1040 in the year transferred.

Q. Instead of buying a Hummer for $70,000, I paid $80,000 for the vehicle and received a $10,000 rebate. Do I have to report this?

A. Yes, well, sort of. When you sell the car, figure your loss by using the sales price of $70,000, not $80,000.

A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.

Q. I successfully sued a hip hop artist for sampling my music. Do I have to report this?

A. Yes. The article goes into detail to determine what kind of income is reportable.

To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces.

Q. I successfully sued my boss for emotional distress. Do I have to report this?

A. Yes.

If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress.

Q. I lost my job and my credit card’s insurance stepped in and made my payments for me. Do I have to report this?

A. Yes.

Generally, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. These plans make the minimum monthly payment on your credit card account if you cannot make the payment due to injury, illness, disability or unemployment. Report on Form 1040 the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year.

Q. I received assistance from a non-profit program to help pay for the down payment of my house. Do I have to report this?

A. Yes.

If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance is not included in your income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. If the corporation does not qualify, the assistance is treated as a rebate or reduction of the purchase price and is not included in your basis.

Q. I got a job with the help of a headhunter who charged me for his services. Do I have to report this?

A. Yes.

If you get a job through an employment agency and the fee is paid by your employer, the fee is not includible in your income if you are not liable for it. However, if you pay it and your employer reimburses you for it, it is includible in your income.

Q. I found an abandoned car and kept it while the person who lost the vehicle likely wept. Do I have to report this?

A. Yes.

If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession.

Q. My travel agency gave me a free tour of Paris. Do I have to report this?

A. Yes.

If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. Report the fair market value of the tour on Form 1040 if you are not in the trade or business of organizing tours.

Q. I hit the jackpot in Atlantic City. No one was around to hear the bells, I didn’t attract any attention, and I am sure there were no cameras in the casino. Do I have to report this?

A. Yes.

You must include your gambling winnings on Form 1040. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings.

Q. I split $54,000,000 in lottery winnings with 12 of my coworkers. Do I have to report this?

A. Yes.

Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses and other noncash prizes.

Q. I inherited a tenement and the tenants who I haven’t evicted are now paying rent to me. Do I have to report this?

A. Yes.

If property you receive this way later produces income such as interest, dividends or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited or distributed to you, that income is also taxable to you. If the gift, bequest or inheritance is the income from the property, that income is taxable to you.

Q. I sold my comic book collection. Do I have to report this?

A. Yes.

If you collect stamps, coins or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain. However, if you sell items from your collection at a loss, you cannot deduct the loss.

Q. I am a street pharmacist and all my income is cash. Do I have to report this?

A. Yes.

Illegal income, such as money from dealing illegal drugs, must be included in your income on Form 1040 or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.

Q. I’m a doctor, and pharmaceutical companies pay me incentives to push their drugs. Do I have to report this?

A. Yes.

You must include kickbacks, side commissions, push money or similar payments you receive in your income on Form 1040 or on Schedule C or Schedule C-EZ (Form 1040), if from your self-employment activity.

Q. I flashed my breasts at a wet t-shirt contest hosted by WTIT in a Miami Beach bar during spring break and won a prize. Do I have to report this?

A. Yes.

If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040.

Q. I won the Nobel Peace Prize (in addition to being Time Magazine’s 2006 Person of the Year). Do I have to report this?

A. Yes.

If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary or civic fields, you generally must include the value of the prize in your income.

See Publication 525 for more information.

Q. I saw my girlfriend on America’s Most Wanted and ratted her out to the police. I collected a sizable reward for material information leading to an arrest. Do I have to report this?

A. Yes.

If you receive a reward for providing information, include it in your income.

Q. I bought art depicting dogs playing poker several years ago and sold the work this year to a rich idiot for a nice profit. Do I have to report this?

A. Yes.

If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry or silverware, your gain is taxable as a capital gain. Report it on Schedule D (Form 1040). You cannot deduct a loss… However, if you sold an item you held for investment, such as gold or silver bullion, coins or gems, any gain is taxable as a capital gain, and any loss is deductible as a capital loss.

Q. I found a bunch of LCD HDTVs which I can only assume had fallen off a truck. I sold a few out of the back of my own truck. Do I have to report this?

A. Yes.

If you steal property, you must report its fair market value in your income in the year you steal it unless, in the same year, you return it to its rightful owner.

Can you think of any other situations in which you may not be sure whether you’re required to report your income to the IRS?

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Brazilian Wandering Spider Actually Huntsman Spider

And to think I was excited…

Yahoo! News reports that the Brazilian wandering spider found in a Tulsa, Oklahoma Whole Foods market was not of the South American persuasion after all. It was just a harmless Huntsman spider.

Now, instead of finding some consider one of the most lethal arachnids in the world, the Whole Foods produce worker found a large but harmless spider. Barry Downer, who is the curator of aquariums and herpetology at the Tulsa Zoo, strongly believes that this is the case.

“There’s pretty definitive evidence it has been misidentified,” he said.

Why destroy the evidence?

Downer also said the spider should have been preserved for study, rather than being destroyed as it was. “It doesn’t make any sense to me why it wouldn’t be saved.”

A University of Tulsa school spokesman has said that the university is investigating how and why the spider was destroyed.

Richard Grantham, who is the director of the plant disease and insect diagnostics lab at Oklahoma State University, agree with Downer’s assertion that the mystery spider should not have been killed and disposed of.

After careful analysis of photographic evidence, Grantham is firm in his belief that the produce-hobo of an arachnid is not a Brazilian wandering spider. Yet why it was not preserved is beyond him, considering the potential public health concerns that would have required further study. A personal loan of his own facility’s resources would have been forthcoming. ... click here to read the rest of the article titled "Brazilian Wandering Spider Actually Huntsman Spider"

Chatted With Ramit from I Will Teach You to Be Rich

Last night, Ramit Sethi from I Will Teach You to Be Rich got together over Skype to chat about money. We spent about 90 minutes answering the questions provided by Consumerism Commentary readers last week. Ramit came up with this idea to coincide with the release of his new book, aptly named, I Will Teach You to Be Rich. This book will be released on Tuesday, and at that time I will share my review of the book and explain how you can acquire an MP3 of my conversation with Ramit.

Here are the topics we discussed in the call:

One piece of financial advice for someone just starting out on their financial journey.
What America can do to ensure future generations are adequately prepared to handle their finances.
Our ideas about frugal dating.
Sacrificing happiness in the present by saving too much for the future.
One financial move we each made that we now most regret.
A personal finance topic in which we don’t practice what we preach.
Putting together a real, workable budget.
The role of values in relation to spending.
How one knows when he or she is rich.
Whether a recent graduate with significant student loan debt should paying it off faster or begin saving for a house.
Whether someone close to retirement should pay off a mortgage faster or save more for retirement.
Credit card rewards programs, 0% balance transfers, and chasing rates to “make” extra money.
Limiting the subconscious effects of marketing.
Personal ethics in investment decisions.

You will be surprised at some of our answers, and I would say that Ramit outclassed me at every turn. If this sounds interesting to you, when I review the new book, I’ll explain how to download the MP3.

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World Water Forum | Water Conservation is Vital

Water: humanity’s lifeblood

Turkish police sprayed protesters with... water?

Turkish police sprayed protesters outside the World Water Forum with... water?

Lauren Morello reports for ClimateWire that when it comes to fresh water on Earth, we shouldn’t assume that we can leave the tap on and it will continue to appear. We must respect its presence and use it sparingly. You wouldn’t flush payday loan money down the toilet; don’t waste water.

Water as a precious and finite resource is what has brought government ministers from more than 120 countries to Istanbul, Turkey for the fifth annual World Water Forum. Sanitation, recreation, agriculture and all water’s other uses will be part of the international discussion.

“We are responsible”

Water managers, writes Morello, have depended upon streamflow, rainfall and snowpack to help ensure sufficient water levels. But global climate has impacted old patterns, causing the water cycle to manifest in extreme ways such as extreme drought and excessive floods.

“We are responsible,” Loïc Fauchon, president of the World Water Council. “Responsible for the aggressions perpetrated against water, responsible for the current climate changes which come on top of the global changes, responsible for the tensions which reduce the availability of fresh water masses so indispensable to the survival of humanity.” ... click here to read the rest of the article titled "World Water Forum | Water Conservation is Vital"

Thursday, March 19, 2009

90% Tax on Bailout Bonuses

The House just voted 328-93 to levy a 90% tax on bonuses for executives of any company getting more than $5 billion in bailout money from the government. It’s rather extraordinary that we’ve gotten to this point.

I can’t say I’m exactly “for” this bill, though I’m not exactly against it either. I share the sense of outrage that people who run a company into the ground can walk away with huge payouts. I actually joked a while back that the appropriate vengeance against these klepto-execs was to create a very high, targeted tax exactly like this– who knew anyone would actually have the guts to do it! But it just seems to have the potential to turn into a big ugly mess that won’t actually do much good.

However, I’m all for progressive taxation, and I think if we’d never rolled back the very highest marginal rates so much, we’d be in less of a mess in the first place. As I always like to remind people, we had extremely high marginal tax rates in the 1950s and it was not incompatible with booming economic growth. If there’s any lesson to be learned from recent months, it is that there will always be people whose greed and ambition knows no bounds. They may work their way to the top, or they may steal their way to the top, but they are dying to get there one way or another. Higher taxation won’t stop them from being productive, but it will help pay for protecting the rest of us from their excesses.

But geez, let’s go back to doing it in a nice, graduated way– what’s going on these days is enough to give you whiplash!