financial decisions

Best Money Tips: Financial Decisions You'll Regret Forever

Amy Lu — Tue, 19 Apr 2016 09:30:33 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found helpful articles on financial decisions you’ll regret, over 200 awesome upcycling ideas, and eco-friendly ways to save money.

4 Common Money Misconceptions About Women

Qiana Chavaia — Mon, 29 Feb 2016 10:30:28 +0000

In a decade-long Prudential survey that studied the financial experiences of women, research data showed that since the 2008 financial crisis, women have made significant improvements in their financial behavior. Still, many continue to admit a lack of knowledge and understanding of sophisticated financial products.

That lack of knowledge causes more than 50% of women to rely on someone else to make financial decisions regarding their future. On the other hand, the study dispels several myths about female financial behavior, casting a more positive light on women's money habits.

Here are four common money misconceptions about women.

1. Women Are Impulse Shoppers

One of the most common misconceptions is that women are impulse shoppers. Data from the survey showed that often, the last-minute purchases referred to as impulse buys are made using funds already set aside within a budget. And the majority of respondents (70%) claimed to spend based on need, not wants.

2. Women Don't Know How to Manage Money

Most people don't fully understand money management — but that's a problem for both sexes, and not unique to women. However, a majority of women distrust the process of turning planning over to a financial professional — six in 10 prefer the help of family and friends. This differs from men, who often prefer outside sources of help.

3. Women Don't Understand Retirement Planning

Women's understanding of workplace retirement plans and IRAs showed considerable improvement since the 2008 crisis, up from 47% to 72% of respondents. While many women have more to learn about other retirement products such as annuities, a majority of female respondents have seen progress in their understanding of retirement planning.

As women increasingly become primary earners or amass significant net worth of their own, their financial behaviors and understanding of money management will undoubtedly continue evolving.

4. Women Don't Make Financial Decisions in Their Households

The belief that women don't make household financial decisions is an entirely outdated and erroneous one, according to the data. The survey showed that 95% of women consider themselves financial decision makers, and 85% of married women say they manage the household's financial decisions themselves, or jointly with their spouse. That means today's women are developing (or in many cases already have) a much more thorough understanding of personal finances and investing than earlier generations.

Do you cling to any of these money myths about women?

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Financial Decisions You Can't Keep Putting Off

Mikey Rox — Wed, 21 May 2014 08:12:39 +0000

The financial decisions you make today will affect your future — often in a big way. But with every other thing you have going on, it can be hard to sit down and tackle some important financial issues. And when you do finally find the time, it's easy to get overwhelmed by all the choices and information. It's no wonder so many of us just avoid the topic altogether.

But if you're looking to build a firm financial foundation, you can't put it off. Here are 10 decisions you need to make.

1. What Is the Best Way to Pay Off Debt?

Getting rid of credit card balances, student loans, and other types of loans can put your money on the right path. However, deciding which debt to tackle first can be tricky.

There are no hard-and-fast rules; therefore, you have to take an approach that works best for you. Some financial experts recommend paying off the debt with the highest interest rate first, whereas others recommend tackling the smallest balance first. (See also: Which Debt Reduction Plan is Right for You?)

For example, if you're deciding whether to pay off a credit card or a student loan first, you might focus your energy on paying off the credit card balance since the interest rate on your card might be three or four times the rate on your student loan. But if you're deciding between two credit cards, you might pay off the card with the smallest balance first.

2. Should I Rent or Buy?

When mortgage rates are low and home prices reasonable, you might consider buying your own place. However, seriously consider whether now's the right time to purchase.

A home is one of the most expensive purchases you'll make, and you'll need a down payment plus closing costs to get your foot in the door. Additionally, as a homeowner you're responsible for routine maintenance and repairs, which can cost hundreds or thousands of dollars per year. Therefore, it's wise to have a cash reserve (funds in your account after paying mortgage-related costs) before taking this leap.

3. How Much to Spend on a House?

Even if you're pre-approved for a specific amount, this doesn't mean you should spend as much as possible on your house. Be reasonable and consider how much you can afford. Generally, mortgage payments should be no more than 28% to 30% of your gross income. But if you have monthly expenses that don't show on your credit report, such as expensive insurance premiums or daycare costs, you might keep your housing expense under the recommended percentage, or else risk becoming house poor. This rule of thumb also applies when renting a home.

4. How Should I Save for Retirement?

It doesn't matter whether you're retiring in 40 years or 20 years, exploring your options and taking advantage of different savings plans can help you prepare for the future.

For example, if your employer offers a 401(k) plan, consider contributing a percentage of your income. And if the company offers a 401(k) match, make sure you contribute the minimum to qualify for the match. This is free money that can maximize your retirement savings. In addition, look into other options, such as a traditional IRA or a Roth IRA.

5. What Is the Best Savings Account to Reach My Goals?

Whether you're saving up for a vacation or a down payment for a house, you need a savings account that will maximize your dollars. A regular savings account is a good start, but you won't earn an impressive rate. Since the average regular savings account earns less than 1.0% APY, explore other options, such as a high-yield savings account, a money market account, or a certificate of deposit. These types of savings accounts earn a much higher rate than a traditional savings account.

6. Which Credit Cards Are Right for My Wallet?

A credit card is an excellent tool for establishing credit; however, to benefit the most from your card, you need one that suits your lifestyle.

A no-frills card might work if you rarely use credit. However, if you use a credit card for most everyday purchases, and you pay off balances in full each month, you'll benefit from a rewards card. Earn cash back, points, or miles for every $1 you spend. It's a simple way to save money on future travel expenses and purchases. (See also: 5 Best Cash Rewards Credit Cards)

7. How Should I Spend My Money?

All of the other decisions on this list are big ones that you don't make very often. This one is a small one that you make every day, and for that reason, it's just as important as all the rest. The way you spend determines how much you're able to save, and whether you're able to reach long-term financial goals. Before you buy anything, ask yourself: Do I need this? It's important that you don't fall for clever sales tactics, nor buy things just because you can. If you compare prices before shopping, avoid impulse purchases, and only get what you need, you'll spend less and save more.

8. How Much Life Insurance to Buy?

A whole life insurance policy never expires, but you'll pay higher premiums. To keep premiums affordable, purchase a term life policy.

It doesn't matter if you're single or the breadwinner, you need adequate coverage in the event of your untimely death. There are no concrete rules regarding how much coverage to obtain. But you should acquire enough coverage to pay your funeral and burial, pay off your debts, and provide long-term financial support to your dependents.

And while you're purchasing life insurance, it doesn't hurt to review your health insurance, homeowner's insurance, renter's insurance, or disability insurance on a yearly or bi-yearly basis to ensure that you're adequately covered.

9. Is It Time to Downsize?

No one wants to give up their dream home. But as the economy continues to shift, you may find yourself with less income than before, and it may be difficult to maintain your house or car payment.

Periodically review your budget to assess what's coming in and what's going out. If you're using your emergency fund to pay living expenses and you're unable to contribute to your retirement, or if your house payment is more than 30% of your gross income, moving into a cheaper house can improve your budget and increase disposable (or savable!) income.

10. Do I Need a Financial Advisor?

A financial advisor or planner can assist in every aspect of personal finance from retirement planning to paying off debt. No matter your goal, your planner will outline a plan to help you achieve financial success, plus review your progress and make suggestions for years to come.

Are there other financials decision we should all consider making that you'd like to add to this list? Let me know in the comments below.

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Decisions That Seem OK Now, but Might Ruin Your Finances Later

Mikey Rox — Wed, 14 May 2014 08:12:28 +0000

No matter how hard they try, some people can't get out of the financial hole they've created. This might be due to financial circumstances beyond their control, such as a job loss or medical debt. But a lot of times, financial worries are the direct result of poor choices.

Some decisions can have disastrous financial consequences, but there are ways to avert these setbacks. Before you can make a smart money move, however, you have to recognize bad ones. (See also: Our Worst Financial Mistakes)

1. Cosigning a Loan

Regardless of whether it's your child or your sibling, cosigning a loan can be financial (and credit) suicide.

As a cosigner, you're not a silent partner in the deal. From a lender's standpoint, you're just as responsible for the loan. The primary signer may vow to pay the loan on time and promise to protect your credit history, but there are never any guarantees. If this person defaults, you'll have to repay the debt, or else suffer the financial and credit consequences.

2. Marrying Poorly

It's easy to overlook financial warning signs when you're in love and planning a marriage. However, before you walk down the aisle, it's important to determine whether your partner is a financial match.

If your partner is irresponsible with money, this could not only set you back financially, it could also strain your marriage. It might take longer to buy a house or start a family; and if the majority of your partner's money goes toward debt, you might cover more than your fair share of household expenses, which can be burdensome and frustrating. (See also: 7 Reasons Why You Shouldn't Get Married If You're in Debt)

Have a candid financial discussion with your partner. Your finances don't have to be perfect. But if you know what you're dealing with, and if both of you are on the same page, you can work together to improve your finances. This way, there are no surprises after tying the knot.

3. Delaying 401(k) Contributions

Many employees have the option of enrolling in an employer-sponsored retirement plan. If you're given this option, you owe it to yourself to consider the possibility. Regrettably, some people put off retirement planning for as long as they can. But the longer you wait, the less you'll have when you're ready to leave the workforce.

For example, a 20-year-old who contributes $5,000 annually to her retirement plan can amass about $2.2 million by age 65. However, if she waits until 40 to start saving and contributes $5,000 annually until retirement, she would only have $430,000 in the account by age 65. This is based on an average 8% return. Don't wait.

4. Living Beyond Your Means

Buying a house is the so-called American dream. But you shouldn't break the bank or overextend yourself to achieve this dream. Too often, homebuyers become overly excited and fall in love with houses that are beyond reach.

You might be able to afford a house on paper. But even if a lender says you qualify for a certain amount, you need to evaluate your other monthly expenses. For example, you might pay a lot for health insurance, auto insurance, day care, or have other expenses that don't appear on your credit report.

There's nothing wrong with getting the dream, just make sure you can afford the dream. If you end up house poor, there'll be little cash for savings and extras.

4. Using Credit Cards as an Extension of Income

Having a credit card with a $10,000 credit line doesn't mean you have an extra $10,000 to spend this year — unless you can afford to pay off the card.

Credit cards are safer when used for emergencies, or when you're able to pay off charges. Unfortunately, some people think of credit cards as their "I-can-buy-whatever-I-want-card." They might charge entertainment, clothes, and other basic needs — without any type of plan to pay off this debt. Credit card balances can accumulate quickly, and once you add in interest, it might take years to pay off balances.

5. Not Building an Emergency Savings Account

You might feel as if you have a lifetime to worry about saving money. However, a financial crisis can happen to anyone, regardless of age. Don't think that you're invincible. If you don't build a cash reserve, you might rely on credit cards whenever you need cash. And if you charge an expensive house or car repair to a high-interest credit card, you may have difficulty paying down the balance.

To build your savings, set aside 10% of your check each pay period. For this to happen, make adjustments in other areas. Can you lower your entertainment budget or reduce miscellaneous spending? Or maybe you can save on transportation and groceries. (See also: 101 Ways to Save Money Around the House)

7. Quitting Your Job Prematurely

You might be eager to quit your job once your home-based business grows. However, quitting your job before you're ready can have serious financial consequences. There are highs and lows when running a business. And if you don't prepare for the lows, you may not have cash in the bank to survive hard times.

Only quit your job if you have an adequate cash reserve, perhaps six or eight months. And only leave your job if the amount you're bringing in can cover your bills and provide a surplus. This way, you don't have to close shop if you lose one or two clients.

Did you make a bad decision that set you back financially? What was it? How did you handle it? Let me know in the comments below.

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Decisions With Unexpected Financial Consequences

Emily Guy Birken — Wed, 26 Feb 2014 10:36:18 +0000

When we think about big, long-term financial consequences, we assume there's a big money decision behind each one: saving up for a down payment on a house, buying Apple during its IPO, taking out student loans, or hiring Bernie Madoff as your investment advisor, for example. (See also How to Improve Your Decision-Making Skills)

And while those big decisions certainly will have an effect on your financial future, many small and non-money-related decisions you make every day may have an even larger impact. This is the Butterfly Effect — the theory that small, seemingly insignificant actions can have far-reaching consequences. You may already be familiar with the Latte Factor — the phenomenon described by David Bach, wherein small purchases, such as your morning latte, add up to large amounts over time. In a similar fashion, small choices and habits made early on can add up to major financial consequences over time.

Here are five decisions you may be making right now than can seriously affect your finances for years to come.

1. How You Deal With Stress

There are two ways that this choice can affect your finances. First, depending on how you deal with stress, you could be priming yourself to reap serious financial rewards or consequences. (See also: Easy Ways to Get Calm)

For instance, if you unwind after a stressful day by smoking a cigarette while enjoying a bacon cheeseburger, you are spending money on vices that could be better spent. For example, a pack-a-day cigarette habit costs a smoker $2,555 per year, and $201,994 over thirty years if you factor in compound interest. Poor food choices can cost up to $4,879 per year and $385,725 over thirty years (with compound interest).

These numbers don't even factor in the health costs of these sorts of habits, which can lead to illness, lost productivity, high medical bills, and even death. No single cigarette or French fry is such a horrendous decision, but forming the habit over a lifetime can seriously derail your finances. (See also: Breaking Bad Habits)

In addition, the way you deal with stress can also affect your ability to make good decisions. Recent research has shown that people only have so much bandwidth for making decisions — which is why talking on a cell phone while driving makes you a worse driver. In particular, living with the constant stress of financial worry means that you have less cognitive ability to make decisions. As Emily Badger of The Atlantic put it, "this explains, for example, why poor people who aren't good with money might also struggle to be good parents. The two problems aren't unconnected." (See also: Poverty Can Make You Stupid)

While the research has shown that the kind of long-term, cognitive-ability-sapping financial stress that those living in poverty experience is not exactly the same as more temporary stress, it does seem fair to assume that living with any kind of stress over a long period of time can deplete your ability to make good choices. Choosing smart stress-reduction techniques can help you to keep your faculties sharp.

2. How Well You Negotiate

Many of us are uncomfortable with negotiation. Women in particular are reluctant to come across as pushy or overbearing for fear of looking bad and potentially losing opportunities. But since most people don't have to negotiate more than a handful of times in a career, it's not that big a deal if it's not in your skill set, right?

Wrong.

According to a recent study by George Mason University and Temple University, your ability to negotiate can have a significant impact on your earning power over your lifetime. In particular, being able to negotiate a higher starting salary means that you will compound your annual raises to a big difference in your overall earnings. The study found that those individuals who chose to negotiate their starting salary increased that initial salary by an average of $5,000. (See also: How to Negotiate Higher Pay at Your Next Job)

The researchers concluded that assuming a 5% annual pay increase and a 40-year career, the negotiator with a $55,000 starting salary would earn an additional $600,000+ over their career compared to their non-negotiating co-worker who accepted $50,000 to start. (Although, to be fair, both the 5% annual raise and the 40-year career in the same field seem to be generous assumptions).

However, it's clearly important to get over your discomfort with negotiation so you can reap the benefits. (See also: Negotiating With Confidence)

3. Who You Fall in Love With

It sounds awfully mercenary to talk about money and love in the same breath, but it is important to consider the financial consequences of your choice of a life partner. Despite what John Lennon promised us, love is not all you need. Falling in love is easy, but staying in love and happily married is much harder. That means marrying couples ought to consider their long-term compatibility — or they may find themselves facing a costly divorce down the road. (See also: Difficult Conversations You Have to Have With Your Spouse)

Even if you avoid divorce, incompatible money attitudes can limit your financial future — not to mention be the cause of some knock-down-drag-out fights. If you and your spouse are not on the same page regarding saving, investing, and spending, then you cannot commit to a shared plan for your finances. That makes it difficult (or impossible) to achieve your financial goals.

That doesn't mean you should be asking dates for their bank balances before considering a future with them, but it does mean you have to work on your communication skills early and often to ensure that money won't be the death of your love — and love won't be the death of your financial security.

4. How You Show Affection

I was once at a relative's Christmas celebration where the grandchildren were so overwhelmed with gifts that they actually started crying because they didn't want to open any more.

This family had fallen victim to a common emotional trap: showing affection by showering gifts on loved ones. After all, it feels great to buy gifts for someone you love and to see them enjoy the presents you picked out.

But showing affection by buying gifts is a great way for all of you to lose out. Not only were these grandparents spending money on toys that became playroom clutter and eventual Goodwill donations, but they lost out on the time value of the money that they spent on those gifts. Basically, by spending that money on piles and piles of presents, these grandparents lose out on the possibility of growing the money by investing (or even just saving) it. (See also: Free Ways to Show you Care)

That said, not even the biggest Grinch in the world would claim that it's a better idea to invest all your money rather than buying gifts. Instead, I recommend Mary Hunt's suggestion in Raising Financially Confident Kids: for every gift-giving occasion grandparents can give each child "one nice outfit, one special toy, and a deposit into [an] investment account."

If it's not grandchildren that you tend to overspend on gifts for, you can still revisit your gift-giving strategy and the way you show your love. Instead of buying presents, figure out ways to make gifts or create experiences that you know your friends and family will appreciate. Not only will those types of gifts last longer than the gadgets you might buy, but you will also give yourself the gift of better finances. (See also: Ultimate Gift Guide)

5. What You Keep in Your Wallet

Imagine you run into the grocery store on your way home from work to pick up a gallon of milk. Even though you know better than to shop while hungry, it's been a long time since lunch and everything you pass looks delicious. How likely are you to go ahead and fill up the cart?

Your answer probably depends on what you carry in your wallet. If all you've got is a $20 bill, there's a limit to the hunger-induced purchases you can make. But if your debit or credit card is burning a hole in your wallet, then the sky is the delicious limit.

You might be wondering how this could possibly affect your future finances. There is the most obvious issue of failing to pay off your credit card balance at the end of the month. If that's the case, then you end up paying interest on your sudden yen for grocery store donuts, making the $3.00 for a dozen deal much less of a steal.

But even if you are in the habit of paying off your credit card each month or using a debit card for purchases, you may still be hindering your future finances. Studies have shown that using plastic for purchases causes you to spend more, because you don't feel the same pain of payment when you swipe a card as you do when you count out bills.

If this were a one-time impulse, then no harm, no foul. However, what you habitually carry in your wallet will determine just how much and how often you decouple the pain of payment from the act of buying.

Instead of only carrying cards in your wallet, get in the habit of paying cash. This seemingly small change will save you a great deal of money. That's because switching to a cash-only wallet will force you to be a mindful spender. You will have to think about what you truly need or want before making a purchase, and you will have to think about how much money you have and spend throughout the month before taking out cash. (See also: Simple Ways to Stop Impulse Buying)

Small Decisions Matter

If you want to grow wealth, retire, become debt-free, or otherwise reach a major financial goal, then it pays to examine how every facet of your life affects your money, no matter how small. Because little things can add up to big consequences.

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Tax Brackets Explained

Julie Rains — Fri, 22 Jun 2012 10:24:13 +0000

Being in a high tax bracket seems to be something that people envy (in others) but avoid (for themselves). But what does that mean, and what does it matter? (See also: 15 Surprising Facts About Income Tax)

Here’s what to know about tax brackets:

Your tax bracket is based on taxable income (not your annual salary) and filing status with the IRS (such as Single or Married Filing Jointly)
The percentage associated with your tax bracket is your marginal tax rate
The percentage associated with your tax bracket is not the same as your average or effective tax rate
You may be able to move to a lower tax bracket by making contributions to a tax-deferred investment account such as an IRA and 401(k); making charity contributions; or selling stock held in regular accounts at a loss
Selling stock at a gain may move you to a higher tax bracket, even if your earned income stays the same

IRS Tax Brackets

Generally, when people talk about tax brackets, they are referencing income levels associated with IRS (federal) tax rates for ordinary income tax and not other types of taxes or withholdings for state and local taxes. Federal income rates and tax brackets change periodically. To give you an idea of current tax brackets, consider these income levels and percentages using information from IRS Publication 505, Tax Withholding and Estimated Tax.

2012 Tax Brackets by Taxable Income

Single Filing Status

10% – less than $8,700
15% – between $8,700 and $35,350
25% – between $35,350 and $86,650
28% – between $86,650 and $178,650
33% – between $178,650 and $388,350
35% – over $388,350

Married Filing Jointly

10% – less than $17,400
15% – between $17,400 and $70,700
25% – between $70,700 and $142,700
28% – between $142,700 and $217,450
33% – between $217,450 and $388,350
35% – over $388,350

What Difference Your Tax Bracket Makes

Your tax bracket determines your marginal tax rate. This percentage can be important when considering financial decisions. Specifically, knowing the marginal tax rate helps you to determine the impact of certain actions (such as making a charitable contribution or making an IRA contribution) on your cash flow.

In trying to understand precisely what “marginal” in marginal tax rate means, I came upon several definitions. The one that made the most sense to me described “marginal” as being the one on the top margin of your income. (Definition from the Dictionary of Financial Terms from Lightbulb Press)

For example, if you itemize deductions and you are in the 25% tax bracket, then a charitable donation of $1,000 will “cost” you $750; that is, you give away $1,000 but get a tax break of $250. Similarly, if you are in the 35% tax bracket, then you could reduce your tax bill by $350 for the same contribution.

Likewise, putting money away in an IRA or 401(k) can have tax benefits. These benefits can be measured by your marginal tax rate. A $2,000 contribution might help you to reduce your tax liability by $200 if you are in the 10% tax bracket or $500 in the 25% tax bracket. When you reduce your taxable income, you may move to a lower tax bracket if you happen to be on the edge of a bracket.

Marginal Tax Rate vs. Average Tax Rate

You pay taxes based on a combination of tax rates (unless you are in the lowest tax bracket, and then you pay based on the lowest rate only). That is, taxpayers don’t pay federal income tax that is equal to their taxable income multiplied by their marginal tax rate. Just a portion of your income is taxed at this higher rate.

To determine your average tax rate, you need to calculate how much your taxable income is taxed at each level.

For example, if you are single and your taxable income is $50,000, then your tax calculation (using Publication 505 to estimate your tax liability) is $4,867.50 + 25% x ($50,000-$35,350) = $8,530.00. Or, you can calculate this dollar amount by applying various tax rates to portions of your income, like this:

Portion 1: $8,700 x 10% = $870
Portion 2: ($35,350-$8,700) x 15% = $3,997.50
Portion 3: ($50,000-$35,350) x 25% = $3,662.50
Total of All Portions = $8,530.00

Then take the total tax amount and divide by taxable income to calculate the average rate. In this case, the average tax rate is 17.06% ($8,530 / $50,000).

Average Tax Rate vs. Effective (or Actual) Tax Rate

Now that you see how the marginal rate differs from the average rate, consider how the average rate varies from your effective or actual rate. The actual rate (federal income tax liability divided by annual income) is less than marginal and average tax rates when you consider that your taxable income is much less than your actual income.

Here are some of the factors in determining taxable income.

Income

For many people, annual income is simply your annual salary or total of yearly wages. But income can also include earnings from a side business or freelance gigs, unearned income from interest and dividends, capital gains from the sale of stock, sweepstakes' winnings, unemployment compensation, and payments from pensions. (For a complete list, review IRS Form 1040 (PDF) and instructions (PDF), call the IRS, or talk to your tax professional.)

Qualifying Expenses and Contributions

Certain expenses and contributions are deducted from income. These may include Health Savings Account (HSA) deposits, student loan interest deductions, contributions to IRAs, and self-employment retirement plans. Certain credits are also available, further reducing tax liability.

Exemptions and Deductions

Your income is reduced by exemptions (personal and dependent) and the standard deduction (PDF) or itemized deductions.

So, your taxable income may be $50,000, but your actual income could be $50,000 + $3,700 (personal exemption for 2011) + $5,800 (standard deduction for 2011) or $59,500 (more if you made contributions to your IRA, 401(k), or HSA). In this case, your actual federal income tax rate is 14.34%. You will probably pay other taxes, like state and local taxes, so if you want to get a complete picture of your tax rate, then add up all taxes and divide by your income.

Capital Gains and Tax Brackets

Long-term capital gains from the sale of investments like stocks and mutual funds not held in tax-advantaged accounts are taxed at special rates. Through 2012, these long-term gains have a tax rate of 0% for those in 10% and 15% tax brackets and 15% for those in tax brackets of 25% and above. Qualified dividends are also taxed at these favorable rates.

Income from long-term capital gains is included in taxable income, so you can’t sell lots of stocks for a profit and expect to pay nothing in taxes. However, if you have relatively low income and sell some mutual funds at a gain, then you may be able to benefit from this tax arrangement.

Short-term capital gains (held for one year or less) and ordinary dividends are treated as ordinary income and taxed at regular rates.

When retirees take money out of their Roth accounts, they pay no taxes on qualified distributions (under current tax laws). Compare that to ordinary tax rates for distributions from traditional IRAs and 401(k) accounts.

So both the amount and the type of income that you have can impact your actual tax rate. That’s why some people can have high incomes but lower than usual tax rates.

Have you ever made a financial decision based on your tax bracket? Share in the comments.

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What Was Your Financial Fork in the Road?

Kentin Waits — Wed, 24 Aug 2011 10:24:11 +0000

Most of us have that pivotal moment or experience that shakes us from our stupor and resets our financial course. Maybe it’s a life change like bankruptcy or divorce. Maybe it’s something as simple as getting burned once by high credit card rates or finally ditching a car loan that had your budget on cinder blocks. What was your financial fork in the road, and what fate did it save you from? (See also: What's the Best Way to Get Out of Debt?)

Though I was raised by fairly conservative parents who made saving Priority One, I had my own money lesson to learn. Thankfully, it was quick and relatively painless.

As I was finishing my senior year of high school and preparing to start college, I decided that I needed a stereo system with a CD player. At the risk of divulging my age, let me just say that CD players were the pinnacle technology back then. To my 17-year-old mind, there simply wasn’t a higher form of musical entertainment.

I picked out my stereo and — drum-roll, please — financed the whole thing. Because I was 17, my credit score roughly matched the outdoor temperature in early spring, and the interest rate was astronomical. Money, especially during those lean college years, was hard to come by. Going to school full-time and working 20 hours a week for $4.85 an hour didn’t leave much room for fiscal error. That $400 stereo cost me roughly $700 in the end. When I finally — mercifully — grasped just how much labor and money I had forfeited in interest alone, something clicked. I was never quite the same again. That single event reset my entire financial course.

The interest, the worry, the sinking realization that I had been ripped off by a lender who saw me coming a mile away — all this imprinted on my mind permanently. The experience crystallized the simple lessons my parents had been teaching implicitly and explicitly my whole life. Though I didn’t shun credit completely, I would never again carry a balance or pay interest and fees on consumer debt. Decades later and still debt-free, I’ve never forgotten my “deluxe stereo” lesson.

But many people never have these watershed moments. They reach their fork in the road and continue along on the well-traveled path of easy credit and high interest. It’s easy to do. If you can pay the interest and never have a hiccup in income, consumer debt becomes a way of life. But if you’ve read this far, my guess is you’ve had your moment. What brought you to that financial fork in the road? Did you arrive early in life, or later? If you’re at that crossroads right now, how is it changing the decisions you make every day and how is it altering your relationship with money?

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Handling Money Decisions with Partners

Thursday Bram — Fri, 25 Feb 2011 23:22:34 +0000

Link:

http://www.openforum.com/idea-hub/topics/managing/article/handling-money-decisio...

When you operate a business with a partner (or several partners), financial decisions can be a sticking point. Everyone involved has a stake in the business, making it important to communicate clearly — but one partner or another can easily feel that he's better equipped to make decisions that involve money, creating potential for problems. No matter how you and your partner decide to handle money, you do need to sit down and put a system in place.

Communication Is Key

Of course, you need to touch base with your partners on financial decisions on a regular basis — but your discussions should go deeper than just whether it's okay to make the next big purchase. You need to be clear about who has any expertise (if any), as well as how to balance the different needs of your business. Ann Campeau teamed up with her brother to create Strut Bridal Salon. She has a background in marketing, while his expertise is finance. Campeau explains, "While we both have MBAs and extensive coporate experience, our decision-making process is rather easy because we don't think we possess the same skill set. In fact, they're quite complementary. Therefore, we literally never fight about how to spend money or which bills to pay. Conversations go like this:

Ann: Bob, we need X, Y, and Z for the store.
Bob: How much? OK, put it on X card.

Bob: We need to focus on paying down X debt.
Ann: OK, I'll hold off on taking new shipments; I'll update our projected cash intake sheet for you."

Not everyone is comfortable in letting one partner — or even a financial manager hired just for that purpose — take the lead in making recommendations on next steps. But that's a conversation that needs to happen between you and partner as early as possible. Campeau's system works for her and her brother because of one key factor: "I think the most important thing is open communication. He talks about our money management challenges (bills, cash flow, credit card limits, ohmygod moments, etc), and I try to give him an idea of upcoming expenses and cash inflows. As long as both partners know where we stand on needs, wants, bills, problems, etc., we've found our system works pretty well." Whether or not you and your partners take a similar approach, communication will always be key.

Don't Sweat the Small Stuff

Even though it is important for each partner to be up to speed on financial decisions for the company as a whole, there are plenty of small, day-to-day purchases that will just slow you down if you need consensus on each one. For most successful businesses, there's a system in place to handle smaller purchases without having to schedule a sit-down that all partners can attend. It makes for a more efficient office and lets the team focus on the big decisions.

Gene Hwang and his partner at Orange Photography have freedom to make small financial decisions without checking with each other. "My business partner and I give each other freedom to spend money on anything below a certain threshold ($1,500, except equipment), but for larger purchases and investments we discuss together and agree before any purchase is made." The approach required a little trial and error on the part of Orange Photography: Hwang notes that prior to putting this system in place, his partner and he were mostly independent when it came to making financial decisions. But they were spending a lot of money and saw a need to touch base on big purchases.

There will always be plenty of big money decisions that go along with running a business. There's no need to seek out more decisions, even if you want to keep close tabs on questions like how many office supplies you need. For most small expenses, there may be the occasional misstep, but you will likely be able to resolve it with a quick chat with your partner before it's repeated.

Let Your Approach Evolve

James Davenport is one of three partners operating All American Martial Arts. Over the course of the company's operations, how these three partners handled money situations has evolved. "We have three partners in our business. Decision-making is pretty easy, we vote...it just naturally developed." The evolutionary process isn't complete, either. The company is moving towards hiring a finance manager. "I think we all believe having a finance manager who can make recommendations to us would be the best method. We're moving towards that. This way, the bias is taken out of the decision making, somewhat...Still, the decision will come down to the partners."

For every company there will be a progression in how you handle any big decision. Financial decisions require changes in how you handle things over time, if only because as you grow, the threshold for how much money it takes to get your attention will change. You may find other opportunities along the way where it makes sense to have one partner step back from management and financial decisions and focus in on something else, or a partner needs to take a reduced role. Many different things can happen that can impact how you handle decisions in your company, and you need to be open to changing your strategy when necessary. It may be worth going so far as to put a date on your calendar every year to check on how your approach to financial management is working for you, so that you can revisit the decisions you've made with your partner and see if you need to make changes to the system you use to handle money.

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Wise Bread's Best and Worst Financial Decisions in 2010

Meg Favreau — Sun, 23 Jan 2011 22:36:53 +0000

With all the rush and stress of the holidays, I find it difficult to spend my late December reflecting on the last 12 months of my life. But now that we're nicely settled into 2011, some of my fellow Wise Bread writers and I have been doing some thinking about 2010 and the great (or terrible) financial decisions we made last year.

One of the best decisions I made in 2010 was to splurge on a half-off certificate for housecleaning from LivingSocial...for a house I wasn't living in. I usually consider housecleaning services to be an unnecessary waste of money: Why pay someone when I can do it myself? But this year I moved during the aforementioned stressful December, and I realized that I could avoid so much extra work and fretting by hiring someone to clean my previous house for me. Being able to spend less time dusting baseboards and more time with my friends and family was so worth it.

One of my worst financial decisions of 2010 also comes via LivingSocial...and Groupon...and all of the other daily deals websites I've signed up for. I love trying new dining and drinking establishments, so I frequently purchase bar and restaurant certificates from these sites. However, multiple times in 2010, I lost track of expiration dates and accidently let certificates I purchased expire. This year, I've vowed to keep better track of these purchases, and every time I buy one, I now mark its expiration date on my calendar.

Here are some more of our writers' best (and worst) financial moves of 2010

Temporarily Leaving the Rat Race

Thursday Bram: In 2010, I made what turned out to be a great financial decision. I took a month off from work.

I run my own business, working for clients on various projects in order to bring in work. I've been doing so full-time for over three years. But I also have plenty of my own side projects that bring in money. I've written ebooks, run blogs, and and generally focused on using my strengths as a writer to build income sources. But I'm constantly frustrated by the fact that I don't have a lot of time to work on these side projects. Personally, I prioritize client work because it's cash in hand — I get payment a lot faster than when I'm developing a product of my own.

In September, though, I told my clients I was taking a month off from work. Honestly, I'd hit a point where I was burnt out, and I was dealing with a family situation anyhow, so I needed some time away. I certainly didn't work straight through October, but in addition to taking a much needed vacation, I figured out a new product that will make it possible to cut back on my client work — and I got most of the preliminary work done on it. I'm still working part-time to finish it up.

Taking a full month off of client work was a tough decision for me — I had to plan my financial situation very carefully, and it caused me some problems. But it remains one of the best financial decisions I made in 2010.

Taking a Sub-Par Summer Job

Margaret Garcia-Couoh: I was all excited when the college I teach for asked me to teach American Lit and World Lit this summer. Normally, I'm bogged down with composition classes so I was super excited to expose kids to literature instead of nagging them about paper writing.

Of course in my excitement I forgot that my own kids would be out of school and would have to be in daycare. Then the price of gas went up in our area. Then I found out that since summer school was for less units and for high school students, I wouldn't be paid my regular salary.

I'd have made more if I'd have just gone on unemployment. Instead I wound up paying my babysitter and the gas station nearly all the money I made from summer school! On top of that the high school students never read and were ill prepared for discussion. I killed my own summer for no reason at all. Never again! Much more cost effective to just stay home with the kids and have fun!

Asking About a Deal

Linsey Knerl: Our local Walgreens is over 20 minutes away, so making special trip is not a good use of gas money (or time). When I found out from a deal blog in May that they were clearing out all of their store brand diapers for $2 a pack, however, I jetted down and cleaned them out. I was worried that I was too much of a "deal hog," so I checked with the manager to see if it was OK. Not only did she approve me buying out the shelves, she brought several more packages up from the back to sell me. "Please take these off our hands so we can stock the new products," she begged. I went home with my Suburban full of diapers in all sizes and less than $50 spent out of pocket. My new baby, born in June, is set — for the rest of his diapered life, anyway.

Setting Aside Specific Savings

Julie Rains: The greatest financial decision for 2010 was to set aside money specifically designated to pay real estate property taxes and homeowner's insurance. We haven't had to take such basic actions in the past because my husband and I just recently paid off the mortgage, and these expenses were included in a monthly payment (held in escrow and then paid by the loan servicer).

Seeing how much needs to be set aside is somewhat of a wake-up call; that is, though we could afford to make house payments on a larger house (and probably snag a great bargain right now!), certain things — like property taxes, insurance, plus upkeep — would still be high.

In recent years, we haven't been as disciplined about designating savings. Making this decision helps us focus on saving for saving's sake and reaching longer-term goals.

Did you make an especially great or terrible financial decision in 2010? Share it in the comments!

This article is from Meg Favreau of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Dilemma of Entrepreneurial Decision-Making

Ken Kaufman — Tue, 11 Jan 2011 17:56:07 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/the-dilemma-of-entreprene...

Informed decision-making is a critical element of entrepreneurial success. Yet all business owners face the challenge of weighing current opportunities against future potential each time they make a decision. First I will recount a quick story to illustrate this dilemma, and then I will discuss how to overcome the dilemma with informed decision-making.

The Dilemma

I watched my son’s eyes widen as the bowl of M&Ms was passed to him. Like a starving defensive lineman might attack a buffet line, he filled both hands with as many as he could, then nudged the bowl on to the next person. While grandma read a holiday story to all the grandkids, the family gathering quickly became a sugary feast.

Just two minutes later a plate of chocolate-covered pretzels was passed to the same son. He looked at his two hands, still mostly full of M&Ms, then back at the salty-sweet treats. I could tell he wanted the pretzels more, but he didn’t have much more capacity. Then he set the M&Ms down, grabbed a large handful of pretzels, and enjoyed both.

About thirty minutes later, three-layer chocolate cake and rich cookies-and-cream ice cream were served for dessert. With eyes bigger than his stomach, my son accepted a large helping of both. After just two bites, he handed me his plate and said he was full. Afterwards he admitted that the cake and ice cream would have been his preferred treat, had he been presented with all three options at the same time.

The dilemma, therefore, has to do with understanding as much about the future as possible without neglecting the present. The proverbial bird-in-a-hand cliché certainly applies, but sometimes that bird will keep you from getting the two birds that are just around the corner.

Entrepreneurial Decision Making

Entrepreneurship is about making lots of decisions — sometimes hundreds per day. Collectively they will determine the fate of your business. Your culture, your employees, your customers, your relationships, your software, your technology, and everything else in your business is a product of the decisions you make or delegate to someone else.

So when you make a decision do you only see the bowl of M&Ms? Or are you so captivated by the potential of something better in the future that you neglect your best opportunities today?

Include the Future in Decisions

To understand the importance of including the future in your decision-making process, consider this example. Software built in the 1990s is very frustrating for programmers and engineers today. It was built on closed, proprietary platforms in a day when an open API was unheard of, with developers afraid of giving away the secret sauce recipe. Not only does this archaic software not function in the cloud, it also does not play well with others, eliminating the endless possibilities that apps and other bolt-on, value-added solutions bring to more current technology.

Embattled with technology that is going to quickly become obsolete or will require significant capital to scrap and rebuild, software from the 1990s is struggling to survive. Understanding the future often empowers entrepreneurs to make better, more informed decisions.

Find the Balance Through Scoreboards

As a word of caution, I have seen some entrepreneurs who live so far in the future that they are not grounded in the present. These folks can’t ever seem to get traction. I’ve also worked with many who are so entrenched in the M&Ms right in front of them that they can’t even consider the cake and ice cream not too far in front of them. And, unfortunately, their competitors are passing them by.

The key to balancing your decision making between the present and future is to base your perspective in reality. Reality can only come if you honestly consider your present and future through the lens of business scoreboards — monthly, weekly, and daily reports of true performance and quarterly, annual, and five-year projections grounded in time-tested, valid assumptions. When properly applied to your decision-making process, business scoreboards will help you determine if you should fill up on M&Ms or if you should wait for the cake and ice cream.

The Key Takeaway

Before each decision, ask yourself this question: “How will my decision impact the business three months, one year, and five years from now?” Deriving a conclusion founded in a realistic perspective of your present and future will help you make the best decision possible.

This article is from Ken Kaufman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Money Trail

Sarah Winfrey — Tue, 19 Dec 2006 16:52:10 +0000

A lot has changed both personally and financially for me this year. So much, in fact, that I've been reviewing the decisions I made in light of their financial and personal impact, and evaluating. I thought I'd share the best and the worst with you.

Worst Decisions of 2006

Not Having a Specific Budget

I don't spend more than I have, and that has always worked for me. Though it still worked this year, I have no idea where large chunks of my money went. If I had a budget, and recorded how closely I followed it, I would have this record and I would know how much I spent where, and where I need to cut back.

Buying on a Whim

I don't do this very often, but I do it enough that it makes a dent in my budget. So many times, I remember having a $20 in my wallet and open it to find a $5 and change. I don't remember where the money went, but it is gone. If I thought about my purchases more, I would know where my money went, and I would be able to remember when it wasn't on the top of my head.

Wasting Time

My time isn't always money, but I'm learning that, if I want to live the kind of life I've always thought I would, I need to value my time more. This doesn't mean that I don't need to rest, but it means I need to be intentional. If I have intentional times of work and play and rest, I will be more productive, both financially and personally, than I am now, and I will be happier because I won't feel like I spend so much time just putzing around.

Best Decisions of 2006

Consolidating My Student Loans

I'm saving so much. Recently, I received information from Sallie May on my payments if I hadn't consolidated, and they're off the charts. Plus, in consolidating with Sallie Mae, I got all the benefits I could--lower interest rates (because I locked them in last spring), and a 6-month grace period. I could make the payments without consolidation, but it wouldn't have been a smart choice.

Blowing My Savings on a Trip to England

Talk about counter-intutive, I know. But, I value travel. Highly. And so it is worth it to me, on a personal level, to have struggled financially last spring for the trip I took over Christmas last year. The experience of spending Christmas with my family in England, and getting to visit a friend over there for New Year's, was simply worth the money for me. Also, I wouldn't have been looking for a job when I was looking, and so wouldn't have found the job I'm happy in now if I hadn't done that.

Starting a High-Yield Savings Account

Since I'm planning a wedding, I've needed my money to be relatively fluid, but leaving it in a regular savings account seemed unwise. At ING, my interest rate has only gone up since I started the account this summer, and my money is available when I need it. ING actually turned out to be a better investment than some of the mutual funds I had. Though their interest rate is a little lower than some, I chose ING because I heard great reports of their customer service. At this point, I have nothing to complain about.

Conclusions

Overally, I'm satisfied with my performance in areas that touch on my finances this year. There are places where I could improve, but I was able to balance my money versus what it can get me better this year than I have before. I was willing to take the trip and not worry about the money, because I valued the experience more than the security. I was also able to find a solution to the problems that caused, and am now saving for the future.

Let me know if you find any of these helpful, or what your best and worst financial decisions were this year!

This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: