Finance

Sometimes I wonder how other people manage their money. I figured I would throw my own way out into the wild and see how it compares to your way. Below I have listed the various ways I deal with earning money and spending money.

Paychecks

I have a percentage of my paycheck directly deposited into my checking account. I have the remaining percentage directly deposited into my high interest savings account at ING DIRECT.

Retirement

401k doesn't have matching so I don't contribute to it. Instead, I have a Roth IRA at Fidelity which pulls a fixed amount from my checking account once a month. For tax reasons it doesn't make sense for me to contribute to my old Traditional IRA.

Other Income

I continually work to figure out ways to diversify my income streams. Two years ago I had no idea how to make money from anything, but a paycheck and some small dividend and interest income. Side work, web site ads, etc. are some of the ways I've found and I try to keep this money separated from my normal day job income. I like to think of it as a bonus and try to save it in a separate savings account and watch it grow. (Of course, it also helps at the end of the year when I figure out taxes which, by the way, are way too high. Sure would love a consumption tax)

Mint.com, a free online money management service, now has the added functionality of supporting student and auto loans, mortgages, tracking interest changes, and more banks.

I've been using the FullView service since I have an account at Fidelity, but these new features at Mint just made it very interesting to me. I signed up for an account last year, but it wasn't really useful to me since I couldn't track my student loans or credit union account.

I think Mint might be worth another look now.

Here's a guest post from fellow young professional John Douglas. In it, he describes a finance application for you Mac users out there...

Budgeting. Managing your expenses. Saving. Investing. They're all things you need to do on the way to growing wealth. But how many people actually do it? Sadly, not enough.

Quickbooks, Microsoft Money, and other financial applications all tout the advantages of their respective products, but more often than not people abandon the routine. In the end, they don't budget. They don't save. And they don't invest. And every January 1 they end up making the same financial resolution.

Now, I haven't used either of these applications in a long while. I've been happy with Excel, or more recently, openOffice. However, i just stumbled upon a great OS X utility that may help your cash management mentality be a little more sturdy. It's called Cash Forecaster and it's free.

It doesn't write checks or pay bills, but it does something that is much more valuable. It SHOWS YOU YOUR CASH FLOWS OVER TIME so that you can see the effects of your spending and saving.

This isn't an end-all be-all solution to financial management, but it's a great way to get a reality check or plan for a vacation.

It's quite simple really. You enter your revenues and expenses, and click view graph. That's it. Each revenue or expense can be set to occur daily, weekly, monthly, yearly, or any other frequency you so desire. And each can have their own start and end dates if necessary.

The only downside here is that while you can create multiple revenues and expenses, you can't really say 'Put this much in a savings account, this much in a 401k/IRA,' and then pick and chose which graphs to display. Instead, you have to create a separate file with your planned deposits as revenue. The nice thing, however, is that they created an amortization feature, allowing you to see your cash flows over time with interest, or take a closer look at your loan payment and forecast out how quickly you can pay off your debt. For those of you with business needs, you can even do NPV models with discounted cash flows.

As I said before Cash Forecaster is far from perfect, but what it does, it does really well.

I found a page on CNN Money that allows you to compare your net worth by age and income. It's not the most precise comparison, but it will give you a general idea of how you compare to your peers.

As 2007 came to a close, I realized I had reached the point where I was earning more and as a result paying more in taxes. Not only am I paying more in taxes this year, but the percentage I pay is going up and the deductions I had taken into account for financial planning are either partially or fully phasing out for me. No longer can I deduct things like student loan interest, IRA contributions, etc. All of a sudden, I'm realizing I should have contributed to a Roth IRA (or my employer's non-matching 401K) and the 20 year student loan payment plan isn't sounding as good since I won't get all that interest back on my taxes! These new circumstances certainly produce a better problem than paying fewer taxes and not making enough money, but all the same it's a problem that should change the way I plan financially.

While I was in college, I planned ahead and began doing things like saving for retirement, investing in the market, opening a high interest savings account, and more. I never paid attention or understood income limitation on tax deductions because they didn't apply to me and I didn't expect them to apply to me for a long time! So, here I am, barely 2 years out of school and I've had a rude awakening. I can deduct only a few dollars of the hundreds I paid in student loan interest, I can no longer deduct college expenses for a class I took for fun since it's not part of a degree program, and the contributions I made to my IRA with after-tax dollars can not be written off as a tax deduction. This makes for a much bigger tax bill than I expected since those were practically all my deductions (having no house nor family to deduct)!

Now that I've identified the problem, there are steps I can take before 2007 taxes are due in April to counteract some of these new issues and other steps I can take to ensure future years' taxes are minimized:

No More Student Loan Interest Deduction
If your Modified Adjusted Gross Income begins inching above $55,000 / year, the amount you can deduct will begin to phase out until $70,000 / year. Considering the average graduate of a engineering program starts out near or above $50,000 / year on average, it's important to take these limits into account now, while you're still young.

No More Tuition Deduction
If you just took a class for fun or to improve your skills, but not as enrolled in a degree program, you cannot deduct those expenses. Also, if you earned more than $65,000 / year, the deduction starts to phase out.

No More IRA Contribution Deduction
Apparently, this starts phasing out sooner than I thought. If you are covered by your employer's retirement plan (even if you don't contribute to it) and make over $52,000 / year up to $62,000 / year your contribution will phase-out. So, this is why it makes sense to contribute to a Roth IRA or my employer's 401K without matching, eh? Take note, you can contribute to Roth 401Ks in some places now, and the contribution limits are different for 401Ks compared to IRAs (which are raised to $5,000 for 2008).

What Do I Do Now?
It's not too late to create a Roth IRA for 2007 even though it's 2008 now. You can create and contribute to IRAs for the previous year as long as it's before tax day of this year. So, I will forget about fully funding my IRA and instead put money towards a new Roth IRA or 401K. Which one depends on the investment choices offered by my employer's plan and the cost of investing in it's funds versus investing in a broker's Roth IRA.

I lose out on the student loan interest and tuition deductions, but perhaps there are other deductions I can take. Did I donate to any charities this year? Did I have a home office? Did I move for a new job? These are the kinds of questions I am asking myself to maximize my tax deductions and reduce my tax burden. I am 26, but maybe I can at least get screwed a little less on my taxes with proper planning.