Current Savings and Checking Account Setup

September 30, 2008

Yesterday I blogged about the organization and how I keep track of my personal finances. Now I’ll try to shed a little light on my current savings and checking accounts, as well as what I may do in the future. Currently, I have one checking account, which is a local (Midwest area) brick and mortar bank. I also only have one savings account, which is a money market rewards account through Capital One. In the future, I plan on opening several online savings accounts for separate savings goals, while most likely maintaining my brick and mortar checking account.

Checking Account

My checking account is convenient as there are locations near my work, my condo and my parent’s house. Also, there are ATMs throughout the major city near me and the surrounding suburbs. I have had a relationship with this bank since I was in grade school. I opened a savings account in grade school and opened a checking account shortly before I left for college. I closed my savings account as the interest rate was basically non-existent, but I still use my checking account to deposit personal and self-employed checks, write checks and my pay stub is deposited directly into this account.

Since this checking account is convenient for ATMs and depositing checks, and there is no minimum account balance, I will most likely keep this checking account around if for no other reason than to act as a base to transfer funds to other savings accounts.

Savings Account

My savings account is a money market rewards fund through Capital One that is linked with my Capital One Visa no hassle rewards card. I opened this savings account when I started seriously saving for my condo down payment. I was looking for a savings account with a competitive interest rate. I stumbled upon the this savings account when it was offering an interest rate of 3.5% with rewards points that combine with my credit card points. I take my average account balance for the month and divide it by 20 to determine the number of miles I earned every month. I have already used my rewards miles for a $300 ticket to Boston.

Future Checking and Savings Accounts

I previously mentioned that I have no reason not to keep my current checking account. I was thinking about opening a WaMu checking/saving account for the brick and mortar presence in my area, free checking, 4% interest, quick transfers between checking to savings accounts and monthly credit score updates. Unfortunately, WaMu failed recently and is no longer an option. I will look into other local brick and mortar banks to see if there are any checking accounts that are more advantageous than my current bank.

Since my Capital One rewards money market account has lowered it’s interest rate to 2.47% and I am using my Capital One credit card less with my new TrueEarnings Costco AMEX card, I will be looking into the standard online savings accounts such as ING, HSBC and FNBO Direct. I am planning on opening multiple savings accounts as soon as I finalize my condo purchase. I would like to have a savings account for each of my savings goals such as: traveling, condo purchases, extra principal payments, emergency fund and retirement accounts.

I hope this has made things a little more transparent as to how my cash is handled. In the near future I plan on making many changes to my current setup. Throughout this process of change I will be writing reviews about my experiences.

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Organizing My Personal Finances

September 29, 2008

My personal finances have not yet become very complex. Every month I do a financial status update, which reveals that I have a checking account, a money market account (MMA), a Roth IRA, a Schwab account and a Vanguard personal account. On the liability side I only have two credit cards (one of which is a new TrueEarnings Costco AMEX card that is new this month) and a car loan. My finances will be getting slightly more complicated as I am closing on a condo this Friday. I currently keep a very simple organizational system that consists of file folders and Excel, although in the future I will be looking into more advanced services like mint.com (a free service) and Quicken.

Current Organizational Setup

Due to the minimal number of assets to track and the continuing efforts of financial companies to go paperless, I have not been forced to complicate my organization with more than file folders. I keep a file folder for each credit card, my checking account, my money market account, my tutoring and regular job pay stubs, information regarding my condo, my Schwab account, my Vanguard accounts, my tax return information and a miscellaneous folder. The miscellaneous folder contains random information such as utilities/bills information, car loan information and donation information.

I track the value of my accounts and my net worth through Excel. Since my current asset structure is very simple, I do not have to use a more complicated method of tracking my assets. I do plan on developing an asset allocation strategy in the near future. When my investment assets are significant enough to allow for an asset allocation without paying exorbitant fees I may have to start using an aggregating software of some sort.

I have also setup an amortization schedule on excel that will allow me to track the principal and interest paid on my mortgage. Also, I can easily track the equity that I hold in my condo and track my progress with the amortization schedule.

Potential Future Organizational Options

Since I do not adhere to a budget of any sort, I have not yet tried to take advantage of financial software. I opened a mint.com account about a year ago, however, at the time mint did not recognize my MMA. As I was transferring money from my checking account into my MMA, the mint.com software continually displayed a net loss in my monthly updates. I’m assuming mint.com has developed the software further since my last attempt and I will most likely return to mint.com in the near future.

I am under the impression that a significant portion of the population uses Quicken or some other similar software to keep track of budgets, assets, liabilities and overall net worth. If I ever stumble upon a free version I will give it a shot. If I like the free version I may purchase the most recent version.

Thoughts on Organization

I have managed to keep my organizational system very simple as my assets and liabilities are very simple. In the near future I plan on complicating the entirety of my personal finances. Starting Friday I will have a mortgage to keep track of. I intend on opening multiple different savings accounts to spread out my savings goals such as an emergency fund (that I plan on CD-laddering), traveling and major purchases. I will be opening a solo 401k before the end of the year. I will be developing an asset allocation strategy for my retirement assets. I will be opening a play account at Zecco as soon as some funds are available. I’m sure with all of these changes I will have to modify my organizational system in the near future and I will be sure to keep everybody informed as I make changes.

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Thoughts On My Future Career Path

September 28, 2008

I have been employed by a small biomedical 8-year old start-up company for just over two years. We have a few FDA approved products and recently went public with an Initial Publinc Offering (IPO). I’m an engineer and spend most of my time working on an R&D team. We’re developing a next generation product that incorporates DNA extraction into our current FDA approved system. Additionally, I’ve been working as a self-employed contractor tutoring high school students for almost one year. I tutor through a company 4-8 hours a week. Recently, I have put significant thought into ways to advance my career towards a higher income and a more satisfying job.

Grad School

I have done significant research in the area of graduate school. There are a few good schools in the area that offer some great part-time graduate degrees. With my family and soon-to-be purchased condo I am unwilling to leave the area for graduate school. One option for graduate study is a masters in product development. I am thoroughly enjoying the product development aspect of my job. I feel as though I would be able to remain in the biotechnology sector and enjoy a career if I specialized in product development.

Also, there are a few great part-time MBA programs within a reasonable commuting distance. As much as I enjoy the science nature of my job, I think a natural career progression demands that I am able to manage other people as well as have a thorough understanding of the business aspect of a company. One of the programs even allows for me to specialize in biotechnology management.

The only problem with the local graduate programs is the cost. My current employer would only pay for $3,000 of my education in a calendar year. If I maximize this contribution, the most I could expect from my employer is $9,000. I may have to switch jobs in order to have more of my graduate education paid for by an employer.

Cons of my Current Job

Although I enjoy most of my tasks, I am learning a significant amount about product development and I am generally happy with my compensation, I do not see a future with my company. Throughout my two years at this company only three people have been promoted within. There are not a lot of layers within my company and I don’t see new layers being created in the near future. Also, my company does not offer a 401k match and will not really help with furthering my education.

Other than the slim chance of career growth within my company, the biggest problem with my current job is the lack of communication from my bosses. I currently have not had a performance review in my two years with this company. This is my first job out of school and I am not being aided by anybody to help me improve my professionalism. If it were not such a small company with many opportunities to experience all aspects of product development, I would have switched jobs a long time ago. I did not even get an explanation as to why I received a 4% salary increase at the beginning of the year. Also, I know some of the engineers at my company received a bonus, yet I have never been told what I needed to achieve or how I needed to perform to receive a bonus. All of these company aspects are extremely frustrating.

Potential Future Jobs

I really enjoy working in the biotechnology sector. I don’t necessarily need to be in a laboratory to enjoy my job, but I do enjoy being in a company that is working with cutting edge technology. There are a few larger companies that specialize in biotechnology and pharmaceuticals that might be willing to help me gain a graduate education, while still keeping my interested in a job. Also, there are a handful of smaller biotechnology companies that might provide me with a more professional and less frustrating atmosphere. The number of job openings are not abundant, but I will be keeping my eyes open for quality job opportunities that provide a step up in responsibility. I do think it might be worthwhile to remain with my current job until the new product passes clinical trials, as that is the only remaining aspect of product development that I am unfamiliar with.

Recently, I was contacted by a recruiting firm that places people in companies that specialize in hedge funds and proprietary trading. He claims that people in the biomedical field have a similar development environment and technical skills to the financial industry. I will most likely follow up with this contact to get more information on the opportunities in the financial investing sector. I really enjoy personal finance and investing. This might be a totally different career path that has the potential to be very satisfying, especially if I am able to find a job with a niche investing in the health and biotechnology sectors.

Self-Employed Expansion

I currently do my tutoring through a company. They do all of the leg work and I basically sit in a room and kids come to me for tutoring. Although it is very convenient, I am missing out on a significant amount of income. Recently, I have been thinking about tutoring on my own. This would require using my old high school math and science teachers, in addition to my current teacher friends for referrals. Advertising for tutoring is significantly based on word of mouth, however, my first students would have to come strictly from teacher and counselor referrals.

In order to start tutoring on my own I would have to set up a website detailing my credentials to put on fliers at libraries, schools and grocery stores. I would have to develop a system of scheduling and maintaining files on students. Also, I would need a place to tutor. I will most likely look into the local libraries, park districts and churches to see if rooms are available for free or rent. The work would be significantly more, however, the pay off is most likely worth it. I will be able to charge three times what I am currently making on an hourly basis. As of right now I will most likely try to start tutoring on my own beginning in 2009 with the spring semester. I will continue to tutor through the current company to maintain my current income with a goal of tutoring completely on my own for the beginning of the next school year.

If I continue to enjoy tutoring and find myself being extremely profitable, I may try to turn it into a full-time gig by working 40 hours a week and hiring other tutors. This idea is far in the future as it would only be possible if the demand for tutoring services is overwhelming and constant. I have not even begun to think about logistics such as health care, especially with a future family to consider.

Conclusion

As much as I currently enjoy my current career, I am looking forward to my future career path. I feel as though there are some exciting and prosperous paths in my future.

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Estimated Taxes For The Self Employed And How To Avoid Them

September 26, 2008

I began tutoring in November of 2007 to supplement my income and boost savings towards my condo down payment. My 2007 income tax return only included two months of tutoring income, which was not long enough a period of time to worry about estimated taxes. In 2008 I will have a full year of self employed income, which will require me to make estimated tax payments, or will it?

Estimated Tax Payments

Estimated tax payments are required by the IRS if you expect yourself to owe the government more than $1,000 when you file your income tax return. Estimated tax payments are due using the following quarterly schedule:

  • 1st quarter due date – April 15
  • 2nd quarter due date – June 15
  • 3rd quarter due date – September 15
  • 4th quarter due date – January 15

Most of the time estimated tax payments are associated with self employed individuals. This is because self employed individuals don’t have taxes already withheld from their income. Under some circumstances a standard W-2 employee will have to worry about making estimated tax payments. This scenario occurs when an unusually large bonus is received,  irregular income is incurred from the sale of stocks or you manage to catch Barry Bonds’ record setting home run.

Penalties

In addition to paying the amount of taxes that hasn’t been paid, a penalty is assessed that is based on numerous factors and is paid along with the payment for the income tax return. An interest rate factor is used to determine the magnitude of the penalty. An interest rate factor is used because the government feels as though they missed out on income from interest. The last factor that weighs into the penalty is when the income should have been reported. If the taxes that are delinquent should have been paid in the first quarter’s estimated tax payment your penalty will be larger than if the taxes should have been paid in the third quarter’s estimated tax payment. IRS Form 2210 is used to calculate the fee.

Withholding from Wages

If you derive most of your income from standard employment, which withholds taxes from your wages (W-2), you may be able to avoid paying a penalty. As the end of the year approaches and you think you might be vulnerable to a penalty, you can ask your employer to withhold extra taxes on your last couple of pay stubs. To take advantage of this strategy you must talk with your employer and fill out a W-4 form. This is possible because wages from withholding are considered to be paid equally over all installments.

Safe Harbor Exception

The safe harbor exception stipulates that no estimated tax penalties will be incurred if the total tax payments (from estimated tax payments and withholding wages) for the year equal 100% of last year’s tax liability. This exception is possible if your AGI is less than $150,000. If your AGI is greater than $150,000 you will use a modified safe harbor exception. For AGIs greater than $150,000 the tax payments must equal a percentage greater than 100% of the previous year’s tax liability. To find this value read IRS publication 505.

Avoiding the Estimated Tax Penalty

Combining the safe harbor exception and the withholding extra wages trick you can successfully avoid paying estimated tax payments and the associated penalty. To do this make sure you withhold enough wages to stay under the $1,000 threshold or withhold enough wages to meet 100% of last year’s tax liability.

My Estimated Tax Payments

I have not been making estimated tax payments as I need the money for my down payment due in a week from tomorrow (WOOT). Additionally, I fully expect to fund a solo 401k with my self employed income, so I don’t expect my tax liability to increase at all. Also, I should have no problem qualifying for the safe harbor exception as my salary increased from my regular job and the wages withheld should have increased accordingly. I will be doing some quick calculations towards the end of the year to see if I do in fact qualify for the safe harbor exception and will file a W-4 if necessary. I encourage all of you self employed individuals to do the same.

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Links

September 25, 2008

I only participated in one carnival this week, The Carnival of Twenty Something Finances hosted by we like money. We like money is a blog about a young married couple’s adventures in finances, early marriage and digging out of debt. Here are a few links to the articles that I found most interesting:

This week I am hoping to get back to increasing my carnival participation and maybe even hosting a carnival. We’ll see how it goes, but I imagine I will be super busy until I move into my condo in 9 long days.


First-Time Home Buyer Tax Credit

September 23, 2008

Recently I visited my condo building for the grand opening weekend. I was not allowed to see my unit as the unit itself was not complete, but more importantly the third floor was not completed. The grand opening was the first time I was allowed to see the inside of my condo building, instead of just driving by and observing from the outside. The builder had six completed units, two of which were fully furnished models. I find it sort of humorous that 13 units have been sold and they chose to finish 6 units for models, but I do understand they have a business to run. Also, in the long run it is better for me if the entire building is sold and occupied. While at the grand opening I picked up a flier from the National Association of Realtors about the first-time home buyer tax credit.

First-Time Home Buyer Tax Credit

Good old G. W. signed a new housing bill into law on July 30, 2008. As a part of this bill, a temporary tax credit will be offered to first-time home buyers, which I will be when I purchase my condo. A credit valued at 10% of the cost of the home, not to exceed $7,500, is available with the purchase of a principal residence between the dates of April 9, 2008 and July 1, 2009. My closing date is October 3, 2008, which puts me right in the middle of this range.

Eligibility

The credit applies to any single-family residence that will be used as a principal residence, which includes condos (WOOT!). This credit only applies to first-time homeowners. To qualify as a first-time homeowner the purchaser and purchaser’s spouse may not have owned a principal residence within 3 years of the date of the purchase.

What is a Tax Credit

Since this is a tax credit, it might be a good idea to explain what a tax credit is. Tax credits reduce income tax liability on a dollar for dollar basis, which is different than a tax deduction. A tax deduction reduces the taxable income so the value of the deduction is dependent on your tax bracket. For example, if you qualify for the full $7,500 tax credit and you owe $5,000 in taxes at the end of the year, the government will send you a check for $2,500. The government will send this $2,500 refund check because this credit is considered “refundable”.

Income Restrictions

There are income restrictions for the tax credit. Single filers are eligible for the full tax credit if their income is $75,000 or less. Joint filers are eligible for the full tax credit if their income is $150,000 or less. There are phase out rules with regards to exceeding the income restrictions. The tax credit for a single filer will begin to phase out above $75,000 and will completely phase out at $95,000. The tax credit for a joint filer will begin to phase out at $150,000 and will completely phase out at $170,000.

Principal Residence

The purchase must be used as a principal residence in order to receive the tax credit. A principal residence is defined as the home of an individual for more than 50% of his time. The credit applies to principal residences for single-family detached housing, condos or townhouses.

Temporary Tax Credit and Repayment

The tax credit is called temporary, because it must be paid back. Repayment will be done over a span of 15 years starting two years after the tax credit is claimed. Interest will not be charged on the amount of the tax credit, effectively making this tax credit more of an interest free loan. I will claim the tax credit in my 2008 income tax return and will begin paying 6.67% of the amount of the tax credit on my 2010 income tax return.

Selling the Home

I have a temporary plan of living in my condo for about 5 years. This is well short of the 17 year repayment plan outlined in the bill (15 years of repayments and 2 years of no payments). If there is an outstanding amount from the tax credit when the home is sold, the amount that has not been repaid will be due in the income tax return from the year of the sale. If the capital gains from the sale do not cover the amount remaining from the tax credit, a portion of the liability is forgiven. For example, if you still owe $5,000 of the tax credit and sell your home for a gain of $3,000, the remaining $2,000 is forgiven.

Applying for the Credit

The tax credit is simply claimed on the tax return of either 2008 or 2009. Even if your purchase will be in 2009, you may claim the tax credit in 2008, which would make the credit available for the down payment.

Personal Thoughts

I have heard numerous people claiming this tax credit will allow people to purchase a home who otherwise couldn’t afford a home, which is exactly how the subprime mortgage mess started. For most people this credit can not be used as part of a down payment, which does not allow people to qualify for homes they can’t afford.

I haven’t decided how I will use the tax credit. To save for my 20% down payment I have skipped retirement savings so far for 2008. I still plan on fully maximizing my Roth IRA and solo 401k. This tax credit could go a long way towards helping me catch up on my retirement contributions for 2008. If I decide that I can fund my retirement accounts without the help of this tax credit, I might use the money as a one time payment towards principal to advance quickly through my amortization schedule. Finally, the money can go a long ways towards furnishing my condo appropriately. I am grateful for this money even if it is only a 0% interest loan. I will never find an interest free deal and turn it away!

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Adjusting Cost Basis to Reduce Taxes

September 22, 2008

I’ve recently posted about capital gains/losses and tax loss harvesting. Both of these topics depend on the underlying concept of cost basis. The cost basis is the original value of the asset, which in most cases is the purchase price plus commission paid to the broker. The cost basis should be adjusted for splits, dividends and capital gains distributions. Adjusting the cost basis is useful for minimizing capital gains and therefore taxes.

Determining the Cost Basis

Say I bought 100 shares of Target stock today at $49.80 a share. The transaction would cost $4,980 for the Target shares and $5.00 (rounded up from $4.95 purchased through TradeKing) for a total cost basis of $4,985.

Cost Basis After a Split

If the same 100 shares of Target underwent a 2 for 1 stock split, I would now own 200 shares of Target. The total cost basis would still remain at $4,985, however, the cost basis per share is different, which is important to know when you sell the shares. Since the total cost basis is unchanged, you just divide the cost basis by the new total number of shares, which is 200. The cost basis per share is now $24.925, which is down from $49.85.

Cost Basis After Reinvesting Dividends

Most larger cap stocks pay dividends out to shareholders. Say the 100 shares of Target stock produced a dividend of $200, which was reinvested at $50.00 a share. The total cost basis is now $4,985 plus the reinvested dividend value of $200, which amounts to $5,185. The cost basis per share is now $5,185/104 or $49.86.

Cost Basis After Capital Gains Distributions

Mutual funds often provide part of the return on investment in the form of capital gains distributions. These capital gains distributions are often reinvested in the fund. The cost basis for capital gains distributions is calculated in the same way as dividends. The cost basis is equal to the original cost basis plus any reinvested dividends plus and reinvested capital gains distributions.

Methods for Determining Cost Basis Upon Sale of Shares

In the above examples the cost basis was determined by adding the original cost basis with dividends and capital gains distributions and determining what essentially is an average cost basis per share. There are other methods for determining the costs basis when selling shares of securities.

  • Average Cost Basis – As discussed above it is obtained by taking the total investments made and dividing it by the total number of shares held.
  • First In, First Out (FIFO) – FIFO dictates that the first share purchased is the first share sold. The cost basis is maintained for each share from the purchase to the sale.
  • Average Cost Double Category Basis – This method requires the shares to be split into two categories: short-term and long-term. A cost basis is determined for each category and shares from either category may be sold depending on the most favorable tax situation.

Step-Up In Basis

I received shares of Target stock from my Grandparents when I graduated high school. The cost basis for these shares is determined to be the market value of the asset at the time of inheritance. This step-up in basis is significant when calculating capital gains because the market value at the time of inheritance is almost always greater than the market value at the time of purchase.

Conclusion

Understanding how to calculate cost basis is important for minimizing taxes. A personal example of the benefit is the Target Stock that was probably purchased when Target was selling below $10.00 a share and was gifted to me when it was selling around $38.00 a share. Stepping-up my cost basis from below $10.00 to around $38.00 will significantly lower my capital gains taxes when I decide to sell my shares. Also, adjusting the cost basis when reinvesting dividends and capital gains distributions reduces taxes. In the example above, if the 104 shares of Target stock are sold for $55.00 a share, the capital gains will be calculated to be $535 ($5,720 – $5,185) if the dividend reinvestment is included in the cost basis, instead of $735 ($5,720 – $5,185) if the dividend reinvestment is not included. The $200 in reduced taxes is worth it for me to pay attention to the cost basis.

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