How Income Taxes Work and My $0 Tax Bill

Taxes seem really complicated. So complicated that a reader asked me to write about how they work so here goes.

No, not all CPA’s are tax experts. Though I had to have an understanding of how taxes worked in order to pass the exam, my work has never involved income taxes. But, we’ve always done our own taxes, even when they were complicated by business sales and rental property.

Even if you hire someone to do your taxes, no one cares about your money as much as you do, so you need to be at least a bit knowledgeable about them.

I use Turbotax. I buy it at Costco in late December/early January when it goes on coupon special. I like answering all of their questions and making sure I’m getting it all right. The Federal e-filing is free and the process is super straight forward. There is an extra $20 charge for e-filing the state return but I still do it because it’s just so easy.

I use last year’s software to get an idea how our current year will pan out. I make a copy of last year’s return and replace the numbers with estimates for the current year. With Obamacare subsidies and the 15% bracket limits, earning an additional $1 of income can cost thousands in additional taxes and premium credit paybacks. So being able to play with my current year’s numbers is important. I know last year’s software won’t be completely accurate but it will be close.

Do you really know how much you are paying in federal income taxes? Continue reading “How Income Taxes Work and My $0 Tax Bill”

You CAN Break the “Rules” and Still Get Here

Being retired early is like a really good chocolate cake. Once you’ve experienced it, you want everyone you care about to enjoy it too.

I’ve been writing so much about budgets lately, my readers are probably saying “enough!”. But I truly believe I reached financial independence because I budgeted and tracked my net worth. When people want to get their financial act together, I suggest they start with a budget. It’s one of my rules.

But you CAN successfully reach financial independence in spite of breaking almost all of the “rules” of personal finance.

I’ve spent a ton of time reading FI/RE (Financial Independence/Retire Early) blogs since I Googled “Can I Retire Yet?” after a particularly trying day at work. There are hundreds of these blogs but most of them were saying this:

Get or stay out of debt
Live on less than you make
Invest the difference

BAM! – simple right? There are a bunch of ways to do this and each of the bloggers (now including me!) are trying to help you by sharing their path to FI/RE with you.

There are fewer paths than you would think: Continue reading “You CAN Break the “Rules” and Still Get Here”

It’s Budget Time!

Queue the Fixer Upper “It’s Demo Day” excitement because it’s budget time! Y’all know I spend New Year’s Day working on my budget and this year is no exception. Vanilla latte, Rose Bowl Parade and my budget . . . so cozy.

You know I love my budget but if you don’t love the idea of a budget, skip it. Yes, gasp! you can skip a budget. Decide what percentage of your income you are going to save and set up automated transfers to get that money out of your checking account. Invest it and live on what is in your checking account. Read my Budgeting Doesn’t Work For Me post for more help.

If you’re still reading, YAY! let’s budget! But what does budget time look like? Sorry but it’s even less exciting than you probably think. It takes about an hour, maybe an hour and a half. 99% of my budget this year will be exactly the same as it was for 2017.

Exactly the same you ask? Shouldn’t I increase each budget by inflation or some amount? Nope, I shouldn’t and I don’t. My “spending” category is my largest one and includes groceries, going out to dinner, buying clothes, etc. It’s pretty much anything other than utilities, vehicle/boat expenses, gifts and vacations. And my “spending” budget is the exact same amount as it was in 2006. Yep 12 years ago. Continue reading “It’s Budget Time!”

Do You Make New Year’s Resolutions?

I’m kind of jealous of people who can make a New Year’s resolution and stick with it. Resolutions don’t work for me. In the past, my resolutions have typically been about starting an exercise program or losing weight. By the end of January, little progress was made and little thought was being given to whatever resolution I had set. So now I don’t bother to make resolutions.

Want to know the best resolution ever made?  Mr. Ms. Liz walked into his office one January 2nd over 30 years ago and his colleague and good friend asked if he had made any resolutions. He replied that he was going to “find himself a woman” that year. I walked in that office 24 days later.  Resolution achieved!

So I love a good “resolution” though I no longer make them myself. I do use the excuse of the New Year to set my financial goals. I guess I could call that a resolution right? As you learned last week, I finalize my full year budget on New Year’s Day. Continue reading “Do You Make New Year’s Resolutions?”

I Started My 2018 Budget . . . Have You?

It’s become a joke among my friends that I spend New Years Day doing my budget.  I usually start working on it a few weeks earlier but I get it finished up while watching the Rose Bowl Parade.

I guess it’s one of my holiday traditions–vanilla latte, parade and budgeting.  Sounds cozy doesn’t it?

I budget my net worth so the earliest I can finish up my budget is New Years Day.  Until I know my starting investment and retirement balances, I can’t budget my investment earnings.

Budgeting one month at a time works for lots of people but I prefer to budget for the full year.

Because I have some ugly months. Continue reading “I Started My 2018 Budget . . . Have You?”

How to Hack Your Mortgage

Yep, if you have a mortgage, you should hack it.

Pick a hack, any hack.  In fact, pick a couple.  Each of them allow you to pay off your mortgage sooner and can save you a ton of money in interest.

First, let’s talk about how mortgages work.  When you get a mortgage, your monthly payment includes both interest and principal.  The principal reduces the amount you owe, the interest pays your lender for letting you use their money.

The best rate I can find today (on bankrate.com) is 3.75% for a 30 year fixed mortgage.  For a $250,000 mortgage, the monthly payment is $1,158.  $781 of that first payment goes to pay the interest.

$250,000 x 3.75% / 12 months = $781 all to interest
The remaining $377 goes to reducing the amount you owe-the principal
For your second payment, a little less ($1.18) goes to interest and a little more goes to principal

Over the 30 year term of the mortgage, you’ll pay almost $417,000 in payments and $167,000 of that is interest.  Yep, even at today’s historically low interest rates, that’s a ton of money going to interest.  So it definitely pays to hack your mortgage.

Hack #1 – round up.  Round up that 30 year loan payment of $1,158 to a payment of $1,200 and save almost $12,000 in interest and shorten a 30 year loan by about 2 years.  Just $42 a month can do what???!!!  Round up to $1,250 and save another $13,000 in interest and shorten your loan another 2 years. Continue reading “How to Hack Your Mortgage”

10 Painless Things We Do To Save Money

If you need to reduce your spending in order to meet your goals, you have to focus on the BIG 3:  lodging, transportation and food.  These three categories typically make up the bulk of your expenses.

We didn’t always make the “smartest” decisions on these three–we own a stupidly big and expensive home, we bought new cars, and we eat in restaurants and buy expensive groceries on occasion.

But I think we were smart about a bunch of little things and those little things helped us grow our wealth and reach financial independence in our 40’s (me!) and 50’s (Mr. Ms. Liz!).

Save your money and the earth:

Don’t light up areas where you aren’t.  We have so few lights on, our neighbors probably wonder if we’re home.  This goes for exterior lights too–we turn them on when guests arrive and leave but they are otherwise off.

When we do need a bit of ambient light in an area–like when we’re running back and forth to the laundry room–we choose the switch that runs two lights rather than the switch that lights up the entire room.  Mr. Ms. Liz narrows it down even further by not using puck lights that are expensive to replace and burn a lot of electricity in favor of using our pendant lights.

Turn off your fireplace pilot in the summer.  This saves natural gas and that little sucker generates a surprising amount of heat. Continue reading “10 Painless Things We Do To Save Money”

But Budgeting Doesn’t Work For Me!

You’re busy, I get it–family, work, physical health, keeping the house clean, trying to get a healthy meal on the table . . .

Budgeting seems like a huge pain–no fun at all.  You know you need one but you’ve not made the time to make one and you know it will be futile; you’ll never track your money or follow a budget anyway.

You may not even need a budget.  What?  You gasp?  And I won’t even call you a slacker for not having one!

Just pay yourself first.

Each paycheck, direct your payroll department to contribute to your company retirement plan up to the company match.

Add the percentage your company matches to the percentage you contribute.

Subtract that from the following guidelines:

Starting in your mid 20’s?  10%
Starting in your mid 30’s?  15%
Starting in your mid 40’s?  30% Continue reading “But Budgeting Doesn’t Work For Me!”

Could You Live On Social Security Alone?

The experts say Social Security provides about 40% of the typical retiree’s pre-retirement earnings.

But that percentage varies a lot.  Lower earners receive a higher percentage of their earnings and higher earners receive a lower percentage of their earnings.

I write a lot about the importance of saving money for retirement because of this 40% statistic.  But COULD I live on my social security alone?  If I could, what would that life look like? Continue reading “Could You Live On Social Security Alone?”

Let’s Make A Deal

I went to a (early!) retirement party for a friend and former colleague of mine this week.  Yay Phil!  It was so fun to catch up with my old work buddies who were there.

Knowing that Mr. Ms. Liz and I are fairly knowledgeable about things financial, one former colleague confessed that he spends about $4,000 a year going out to lunch.

If you read last week’s post, you know that if you LOVE going out to lunch and it completely enhances your world,  you should go out to lunch and enjoy every minute and every morsel.  (So long as you don’t have consumer debt like credit cards and you are saving at least 15% of your income for your retirement).

But he was making this confession because going out to lunch doesn’t completely enhance his world, it just makes life a bit more convenient.

He thinks $4,000 a year is too much money.  Yep, it would be too much money for me too. Continue reading “Let’s Make A Deal”