Why do you worry about money so much?

The other day I was walking around with my sister when the topic of money came up. I told her how I didn’t really like to spend money on things that I didn’t need. This was when she asked me the following question: “Why do you worry about money so much? Money doesn’t buy happiness” I thought about the question for a split second and replied, “It doesn’t buy happiness, true, but it does buy freedom.” Her reaction was priceless. “Woah. You just blew my mind.” The funny thing is, a lot of people don’t look at money in this manner.

While it is true money doesn’t buy happiness, it gives you freedom to do what you want. If you are fortunate enough to save enough money, you will be financially independence. As a result, you will be able to “retire” from work a lot sooner than your counterparts. Instead of sitting in traffic five days a week on your morning commute for forty years of your life, you will be able to sit back and live life the way it’s meant to be lived.

For me personally, I don’t want to be a part of the 9 to 5 until 65 club. I plan on achieving financial independence a lot sooner than that. I want to enjoy my life as much as I can. I want to have the ability to travel. I want to spend as much time with my future children and spouse. I want to be in control of money, not let it control me. In order to do this I have to make some sacrifices, and I am perfectly content with that.

What is your view of money? Are you in control of your money or do you let it control you?

Credit cards are great!

Credit cards don’t put people in debt, people put people in debt. Credit cards have a negative stigma around them due to their high interest rates and the horror stories from individuals in huge debt. As a result, many people are afraid to take out credit cards. In this article I want to dispel those myths and explain some of the great benefits you of owning a credit card.

What are the benefits of having a credit card?

Benefit #1: Credit Cards will help you build credit.

Good credit isn’t something we think of until we need it. It’s not as if we go through life thinking about what our credit score is. For that reason we tend to ignore this first benefit of credit cards. Having a good credit score can save you tens of thousands of dollars in the future.

How does you credit score affect interest rates?

The better your credit score, the lower an interest rate you pay on loans. For example, let’s say you borrow $200,000 to purchase a home on a 30-year fixed loan. According to myfico.com, if you have a credit score of 650 (which is considered a “fair” score), you will pay and annual percentage rate (APR) of 5.085%. However, if you have a score of 700 (which is considered a “good” score) you will pay an APR of 4.624%. What difference does this make over a 30 year period? If you have a “fair” score, you will pay $190,260 in interest over the life of the loan. If you have a “good” score, you $154,787 in interest over the life of the loan. This is a savings of $35,473! Try it out yourself! Go to http://www.myfico.com/myfico/creditcentral/loanrates.aspx and play around with some numbers and see what you discover.

Benefit #2: Credit card companies have strength, and will help you when you need it.

Another great benefit is that credit card companies are on your side when you make purchases. If you buy a product that you are not satisfied with, and the company you bought the product from is giving you a hard time, the credit card company can help save you the headache of trying to get your money back. If a company won’t refund your money, chances are the credit card company will. This is called a chargeback. The threat of chargeback will give the company you purchased from an incentive to provide good customer service and timely refunds if appropriate.

Benefit #3: Extended Warranties

Many credit cards will extend your warranty up to a year for purchases you make with your credit card. This can come in handy, especially for large electronic purchases. There is no need to buy the extended warranty if you make you purchase with a credit card!

Benefit #4: Customer Rewards

Many cards will pay you nice rewards in the form of travel miles or cash back bonuses. For example, American Express offers 6% cash back on groceries and 3% back on gas if you get their Blue Cash Preferred Card, which costs $75 a year. Chase offers 5% cash back on a rotating list of categories and 1% cash back on all other purchases with their Chase Freedom Card. There are a number of other cards which offer great rewards and travel miles, which I won’t go into too much detail here.

Credit cards have a number of benefits to consumers as stated above. If you are a reliable and responsible with your debt, a credit card could be one of the best investments you make.

What do you think of the benefits to owning a credit card? Do you own any credit cards? Why or why not?

Why you should always choose a Roth IRA

In my previous post I discussed the difference between a Traditional IRA and a Roth IRA. In this post I’m going to talk about why you should choose a Roth IRA over a Traditional IRA.

What a Roth IRA?

A Roth IRA is a retirement account which allows you to put away $5,500 (after taxes) a year. While these contributions are not tax deductible, a Roth IRA will pay off when you actually do withdraw your money. You see, with a Roth IRA you are allowed to take out your money without paying any taxes! You will get away with paying a 0% tax rate in retirement. What’s better than that?

I want to withdraw money from my Roth IRA, will I face a penalty?

You are allowed to withdraw your contributions from a Roth IRA at any point and time without facing a penalty. Here it is important to differentiate between contributions and earnings. Say you put in $1,000 and earn $50 in interest in your Roth account. You are allowed to withdraw your original $1,000 without facing any penalty! Why is this so wonderful? With a Traditional IRA you are required to pay both taxes AND a 10% penalty if you withdraw ANY money from your account.

In addition, you may contribute to a Roth IRA if you also participate in a 401(k) plan from your employer. While you may also be allowed to contribute to a Traditional IRA, you lose the benefit of deducting a certain percentage of your contribution, depending on your income rate. See the chart for deductions in my previous blog post. With a Roth IRA, you do not have to give up the benefit of tax free withdraws just because you have a 401(k). In summary, if you have a 401(k), open up a Roth IRA to maximize the tax benefits.

Finally, a Roth IRA does not require distributions based on age. You see, when you have a Traditional IRA, you are required to make withdrawals at the age of 70 ½ years old. With a Roth IRA you do not have to make withdrawals. If you are old and have a ton of money stashed away, you are not required to take money out of your Roth. Why does this matter? You will be allowed to let your wealth continue to build TAX FREE after the age of 70 ½, which means your can leave more money to your beneficiaries.

What are you waiting for? Open a Roth IRA today!

Traditional vs. Roth IRA, Which one should I choose?

What is a Traditional IRA?

An IRA stands for Individual Retirement Account. IRAs are held at banks and brokerages and allow you to invest in almost anything you can imagine. The benefit of having a Traditional IRA is that you can deduct your contributions on your tax return.

What is a Roth IRA?

A Roth IRA is very similar to a Traditional IRA. There is one exception: the money you contribute to a Roth IRA is taxed today (you cannot take a deduction on your tax return for contributions), but it is not taxed when you withdraw any money in the future. Therefore, all money you take out of an IRA, included gains on your investments, are not taxed in the future.

How much can I contribute to my IRA?

When you have an IRA, either Traditional or Roth, the most you can contribute is the lower of $5,500 or your taxable compensation for the year. If your taxable compensation is below $5,500, then you will be limited to the amount of your taxable income for the year. If you are over the age of 50, you are allowed to contribute $6,500 to your IRA.

How much can I deduct on my taxes for my IRA?

The amount you can deduct on your taxes depends on one condition: Do you or your spouse (if married filing jointly or separately) have a retirement plan at work? If the answer is no, they you are allowed to deduct the full amount of your contribution to your IRA. If the answer is yes then it can be a bit tricky.

I have a retirement plan at work, how much of my IRA contribution can I deduct?

The following chart is provided by the IRS to help determine how much of your IRA contribution you can deduct when you are provided with a retirement plan at work:

If Your Filing Status Is…

And Your Modified AGI Is…

Then You Can Take…

single or
head of household

$60,000 or less

a full deduction up to the amount of your contribution limit.

more than $60,000 but less than $70,000

a partial deduction.

$70,000 or more

no deduction.

married filing jointly orqualifying widow(er)

$96,000 or less

a full deduction up to the amount of your contribution limit.

 more than $96,000 but less than $116,000

  a partial deduction.

 $116,000 or more

 no deduction.

married filing separately

 less than $10,000

  a partial deduction .

 $10,000 or more

 no deduction.

If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “single” filing status.
married filing jointly with a spouse who is covered by a plan at work

$181,000 or less

a full deduction up to the amount of your contribution limit.

more than $181,000 but less than $191,000

a partial deduction.

$191,000 or more

no deduction.

married filing separately with a spouse who is covered by a plan at work

 less than $10,000

 a partial deduction.

 $10,000 or more

 no deduction.

By utilizing this chart, take your filing status and adjusted gross income, and you can see if you are allowed to deduct the full amount, a partial amount, or no amount.

When can I withdraw money from my IRA?

The IRS allows you to withdraw from you IRA (Traditional and Roth) without any penalties after the age of 59 1/2. If you do withdraw from your IRA before this age you will be hit with a 10% penalty on top of the taxes you owe to the IRS. There are certain exceptions that will allow you to withdraw money penalty free before the age of 59 ½, which I will discuss below.

How can I withdraw money from my IRA without facing a penalty?

  1. You are over the age of 59 ½ you can withdraw money from your IRA penalty free. ‘
  2. You use withdrawals to pay higher education costs for your spouse, your children, or grandchildren.
  3. You can take up to $10,000 (or $20,000 if you are a couple) to buy, build or rebuild your first home.
  4. You use money from your IRA to pay for medical expenses in excess of 10% of your AGI which are not reimbursed during the taxable year.
  5. You become disable and can no longer be gainfully employed.
  6. You die and leave it to an heir.
  7. Roth IRA – You can withdraw your contributions but not your earnings (interest and dividends accumulated) from your Roth IRA at any point in time.

How long can I contribute to my IRA?

If you have a Traditional IRA, you are allowed to make contributions until the age of 70 ½ years old. If you have a Roth IRA, you are allowed to make contributions as long as you are alive.

Should I choose a Traditional IRA or a Roth IRA?

When deciding between a Traditional IRA and a Roth IRA, it could be tricky. With a Traditional IRA you can deduct your contributions in the current year that you make them. This is appealing if you want to lower to tax burden in the current year. You would also want to choose a Traditional IRA if you believe you will be in a lower tax bracket when you are older. That way you limit your tax payments to the lower future tax rate. In addition, you can contribute to a Traditional IRA at any time without income limitations. This differs from a Roth IRA which does not allow you to make contributions if you make over a certain income level.

With a Roth IRA, you cannot deduct your contributions in the current year that you make them. However, you will not be taxed on the money you take out of a Roth IRA in the future. This is appealing if you think you will be in the same or higher tax bracket when you are older. In addition, you can take out your principal contributions at any time without facing a penalty.

When it comes to choosing retirement accounts, take your time. Consult with your accountant or tax professional and make sure you pick the retirement account that best suits your needs.

Day Trading = Financial Suicide?

One method of making money in the stock market is day trading. Day trading rose in popularity in the late 1990s when investors could double or even triple their gains within a matter of hours. With returns like this, it was hard to resist the temptation of becoming a day trader yourself.

In this day and age, you do not get the returns that you could have gotten in the 90s, but the temptation to day trade is still there. Markets have been booming ever since the Great Recession. Since the market bottomed out in 2009, the S&P 500 has returned 172% and the Dow Jones Industrial Average has returned 131%. Due to the increase in markets at such a rapid rate, investors today have been able to day trade and achieve solid results.

As a matter of fact, I just recently read an article on a 16 year old who began day trading and had thus far achieved decent results. In 2012 her stocks returned over 34% vs the S&P 500 which only returned 12%. While it is not impossible to achieve those results, it is hard to maintain such rapid rate over a long sustainable time period.

Jason Zweig discussed the topic of day trading in his commentary to The Intelligent Investor. He discussed that while some trades make money and some trades lose money, your broker will always make money. In addition, he goes into detail about the true cost of trading over such short time periods.

The Costs of Day Trading

  1. Your own eagerness to buy and sell stock will lower your return. Zweig call this cost “market impact.” While this cost doesn’t show up on any of your statements, it can cause you great losses. Let’s say you are eager to buy a stock, and you end up paying an extra 10 cents per share to get it. If you buy 500 shares of that stock, you just cost yourself $50. On the flipside, if you sell the stock too soon, you can also lose out on significant gains.
  2. Brokerage fees eat into gains. Many brokers will charge you anywhere from $4 to $9 to make a trade, no matter how many stocks you purchase. Assuming you pay $7 per trade, you will pay a total of $14 to buy and subsequently sell a stock. If you purchase $1000 worth of stock, this will eat into 1.4% of any gains you make.
  3. Taxes, taxes, taxes. When you buy and sell your stocks frequently, taxes can eat into your gains significantly. Any gains you make on stocks you sold within a year are taxed at your ordinary income rate, which could be up to 39.6%. Compare that to the maximum rate of 20% you pay for gains for stocks held on to for over a year, and you could be paying significantly more in taxes.

Research Study

Zweig also cites a study done by professors of Finance Brad Barber and Terrance Oden at the University of California. In this study, the professors studied 66,465 households with accounts at large discount brokers from 1991 to 1996. What they found was those that traded the most (portfolio turnover of 21.5% a month) had an average return of 11.4% vs a return of 18.7% for those who had the lowest turnover (portfolio turnover of 0.19% a month). In addition, those who had the lowest turnover actually had a slightly better return than the market average. The chart below shows a visual representation of this study.

Image

Questions/Comments?

Have you ever day traded? What are your experience with day trading? Please leave a comment below. I’m interested to hear your opinion.