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Sharebuilder Update: Bonus Funded

Back in February, I signed up for a Sharebuilder account with a $50 bonus promotion after the first trade. I debated on what I should buy. So, I funded the account with $40 and bought Simon Property Group (SPG). I chose SPG for several reasons. First, they are a REIT, and as such, they must distribute 90% of their profits in the for of dividends. I live dividends, and I have setup my sharebuilder account for free dividend reinvestment. Secondly, they have been rated the #1 most-admired company, by Fortune Magazine, for the second time in four years. Third, and maybe most important to me, they are a local company and I can walk by and see how things are going at any time. I also like to walk around malls and talk loundly to my wife and family about walking through "our" mall. If I am there with friends, I often ask their opinion of "my" mall. Anyhow, I did an automatic purchase and tried to be smart. I ended up screwing up, because I decided to spend $36 thinking that $4 more would be deducted for the transaction fee. Well, I bought $32 worth of SPG, and I had $4 sitting around in the money market account for over a month. I did earn 1 cent in interest. Finally, PSECU funded my $50 today.




I have it setup to invest $54 in SPG on Tuesday. This means I will have nearly one share of SPG, depending on the purchase price. I am changing my W-4 to stop all Federal withholding for the rest of the year, as I got a complete refund for 2005, and I have paid a hefty chunk in withholdings already. Part of that will help my $10K in cash goal for the next ten years. The other part may go to fund my $35K in bonds or $55K in stocks over the next ten years. In the stocks, I am always looking for dividend producing stocks, because I like them. There is a great opportunity, even in a down market, when you reinvest dividends. So, I have a few other REITs that I will invest in, and then I may look into some healthcare stocks.



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Amortizations For Everything

I started to recalculate my financial goals today. I broke out my goals for 1, 3, 5, 10, 20 , and 30 years. The goals were for net worth. My main focus is my 10-Year Goal. Within ten years, I want a net worth of $1,000,000 (with a ridiculous laugh and my pinky at the corner of my mouth)! Anyhow, I broke it out into liquid assets, retirement assets, real assets, and business holdings. My focus for today included liquid assets. For liquid assets, I broke it out into three categories, as well: cash, stocks, and bonds. I consider these all to be fairly liquid. Then, I wanted to figure out how much I need to start putting away to get to these goals. The answer is amortization.




You may have heard of amortization used with loans, especially mortgages. However, you can use amortizations for savings, as well. I wanted to input three items and find out a fixed amount I would need to save per month. Those three items include the rate of return, the length of time, and the goal amount. Given these requirements, I found an online amortization calculator that can work this way. I found it at the website for Time-Value Software.


Cash


For my cash savings, I want to have $10,000 in this account, within the next ten years. I currently save my cash in my HSBC Online Savings account at a rate of 4.80%. So, I made the "Deposit Amount" field blank and enter 10 for the "Number of Years", 4.8 for the "Rate of Return", and 10,000.00 for the "Savings Amount." Then, I hit calculate. It determined that I need to be saving $65.09 per month into my cash account, and I will have $10,000.00 in ten years. Pretty simple. However, I actually would like to be further along, sooner, and then back off of my contributions. For my one year goal, I want $3,000 in there. So with these criteria, I calculated that I need to save $244.55 per month. Still pretty easy.


It begins to get more complicated, however, because at three years, I want $5,000. So, I enter 3000 in the "Balance at Start Date" field, and then change the "Number of Years" to two (first year plus two more years), and the "Savings Amount" to 5000. So, for the following two years, I would need to save $67.56 per month. I did this same calculation for five years, and then did a revision for ten years. After the three years, I would need to save $99.35 per month for the next two years, and that would get me to $8,000. For the remaining five years, I would need to save anything to reach $10,000 after five more years. I will likely want to change these numbers around a bit, because I would like to gradually put less money in the cash account and not be on a bumpy ride.


Stocks


This one is very difficult to be accurate with, because you can not get a guaranteed rate of return with stocks. Further, this tool cannot determine dividend reinvestments, and such. However, you could pick some rate of return based on your own thoughts (8% on the convervative end, and up to whatever you decide on the more aggressive end). I won't bore you with these calculations. But, my goal is to have about $55,000 in stocks within the next ten years. At 8%, flat over the ten years, I would need $300.64 per month.


Bonds


These are pretty good right now, and somewhat liquid... depending on when you want to get to them. I am looking into I-Bonds from Treasury Direct. These are currently at 6.73% and are tax deferred. Flat over ten years, I would need to invest $205.23 per month to reach my goal of $35,000 in ten years.


None of these calculations take into account taxes or costs of investing. For instance, I use Sharebuilder to buy stocks, and it costs me $4 in on each purchase. So, the easiest way is to take your investment amount, and add the costs to it. And, with some simple addition, you will see that my goal for liquid assets is $100,000 in ten years. I have adjusted that considerably, as I wanted $1,000,000 in liquid assets before. However, I am not concerned as much with that if I can have decent cash flow from some personal business holdings.


Rounding out my ten years finances, I would like an additional $100,000 in retirement savings, $500,000 in real property (primary residence and a vacation property), and $300,000 in personal business holdings. I believe I would be able to retire, other than maintaining my personal business holding, within ten years based on these figures. All of this at the age of 35!



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Google Finance

Well, I am sure you have at least heard about Google Finance. I am very happy with this move. I have used Yahoo! Finance in the past, and it is alright, but I am partial to Google because I own it via a mutual fund, AGTHX. So, when it was announced that Google would be holding a live beta for Google Finance, I was excited.




From what I have read, there are many people who are complaining about a lack of features. However, you must remember that this is a beta, and it just started. I have already seen changes, just after my one day of using it. So far, Google Finance is better at everything it provides. I would expect nothing less. I noticed today that they added in news event to the stock graph, so that you can see what news events happened at what price point, and then you can try to measure what effect it had, if any.


As with everything that Google does, I am sure Google Finance will be extremely featureful, and highly polished. Give it a couple of months and I am sure it will be about as complete as necessary to make Yahoo! Finance irrelevant.


On a side note, I am a bit angry with Google because they cancelled my AdSense account. It happed one day after I posted about executive salaries, and I shed some light on the Google Execs compensation. Seems fishy. They said it was for possible click fraud... but I certainly know better than that.



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Children and Tax Advantages

I have several posts that relate hiring your children if you are self-employed or run you own side business. Well, there are other advantages, as well. Obviously, there is the dependent deduction, which is $3300 in 2006. Additionally, there is the Additional Child Tax Credit, which is $1000 per child in 2006 (http://www.irs.gov/newsroom/article/0,,id=106182,00.html). However, there are greater tax breaks available.




In previous posts, I discussed the ability that tax payers have if they hire their own children, if they are self-employed, or even have their own side business. Typically, when you hire employees, there are all sorts of taxes that must be paid. For instance, you may pay the Federal Unemployment Tax Act (FUTA) tax. In addition, employees must pay the Federal Insurance Contributions Act (FICA) tax, and employers must match that. However, when you hire your own children (in a sole-proprietorship or partnership with your spouse), you do not have to pay FUTA taxes on your children (if they are under the age of 21), and you child does not have to pay FICA taxes (if they are under the age of 18), and you do not have to pay the match. Any money that you pay to your children is a business expense, so it lowers your income amount, resulting in lowers tax. In addition, your child does not even have to have income taxes withheld if he/she earns less than the standard deduction. In 2006, the standard deduction for single individual is $5150. The only caveat is that your child must be at least eight years old, and you must follow child labor law practices (which means limiting the number of hours your child works). So, you can essentially have another $5150 tax break for each working child. That money stays in your family, and you can setup custodian accounts to direct the money in the way that you see fit, for your child.


So, do you do with that money? Many of us are looking for ways to fund our children’s education. I see two places where you can gain an even greater advantage from this situation. The Coverdell ESA (previously known as the Education IRA) and the Roth IRA are great places to store education funds. These accounts allow you to contribute after-tax funds, and the earnings are tax-free for qualified education expenses. However, in our situation, the contributions will be tax free, as well. I would suggest contributing to the Roth IRA first, for several reasons. For starters, all funds in a Coverdell ESA must be withdrawn, or transferred to another family member, by the age of 30, else there are penalties. Also, funds in a Coverdell ESA are considered in financial aid filing. The advantages of the Roth IRA are numerous. First, all contributions can be withdrawn after five years, without penalty. This is great if your child turns out to be a genius and gets a full scholarship, because your child could withdrawal these funds for a down payment on a home. Further, there is no age distribution on the Roth IRA, for education or retirement. Further, you may have not known that funds from a Roth IRA (contributions and earnings) can be used for qualified education expenses, penalty free. So, contribute the funds to a Roth IRA first ($4000 in 2006), then the remainder to a Coverdell ESA ($2000 in 2006). Plus, anyone can contribute to a Coverdell ESA, so a grandparent or relative could be nice and finish out the contribution to the Coverdell ESA, which would be $850, if the child earned right up to the standard deduction. Then, when your child withdrawals funds for education, withdrawal from the Coverdell ESA, first, and only touch the Roth IRA if absolutely necessary.


However, that is not all. There are other tax breaks available for children who are under eight, or are not employed by their parents’ business. Each child can have up to $800 per of unearned income that is tax free. This would include income from interest and dividends. So, at birth, you could gift an amount to your child that could produce $800 a year in interest. This would be in a custodial account. Then, you could withdrawal that $800, as you would not want to exceed that limit the following year, and you can either contribute it to a Coverdell ESA for your child, or you can use it to pay for non-essential expenses of your child (essential expenses include things that are the parents’ responsibility, like food and shelter). So, you could use the $800 per year for Christmas and birthday presents, entertainment expenses like movies or other things. I like the idea of jump starting a Coverdell ESA. Remember, a Roth IRA can only include contributions from earned income, and since your child cannot work until age eight, that means no Roth IRA until eight years of age.


These are ideas that I have considered for my children. Since my children’s education is of a great concern, I really look for ways that I can meet those needs. If I had to consider all of that as personal income, I would have to pay more in taxes, which might lower the amount that I can contribute. With three children, this adds up to a great amount. My oldest reaches the magical age of eight next month. And now, I am armed with some new tools to begin earlier with my younger two children.



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What $300,000+ Buys You in Metro Indianapolis

JLP, @ AllThingFinancial, has started a series about what $300K buys you in different areas of the country. Well, I thought I would share what it would by in my neck of the woods... the metropolitan Indianapolis area. I found a nice property in a suburb on the West side called Brownsburg. It comes in @ $289K. It is four bedrooms, two and a half baths, and has a total sqaure foot of 2772 Sq. Ft. (3814 Sq. Ft. including the basement).





That is a nice house. Here is a link that has several other pictures associated with it.

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The Benefits of Being Self-Employed

Long time, no post. Sorry about that. I have been super busy. One of the things I have been working on is my own business. I still work full-time for my employer, so squeezing in time for my own business is difficult (and it cuts into my blogging time). However, I think that anyone concerned about their personal finances should look into the benefits of owning their own business. As this is something I always contemplate, I figure I would share some of the ideas I have thought of myself, and some that I have stumbled upon elsewhere.




One of the very first benefits to running your own business is the tax write offs that you receive. Annd these benefits have improved over the last few years, particularly if you run your business from your home. For example, if you have a home office, you can deduct utilities, mortgage interest, and even depricate the portion of your home (over 27.5 years). The deprication portion used to always be something to tread lightly on, because it would mean you would have to pay capital gains tax on that deprication when you sold your home. However, in recent years, the capital gains taxes on home sales have nearly been eliminated for the average American. So, you can write off a portion of your mortgage interest and property taxes (you will want to weigh this against your ability to itemize your taxes), a portion of standard utilities (water and sewage, electricity, gas, and maybe your telephone), and all of your utilities and expenses that can be considered for business use (Internet access, business phone lines, cellular phone service).


Beyond that, you can write off mileage that you accumulate on your personal vehicle. You have an option here, though. You could actually take all the expenses associated with using your personal vehicle and write those off. This would include the price of fuel, a portion of your auto insurance, maintenance, car washes (if you need to impress your clients), etc. Or, you could lease your vehicle and claim its entire use as for your company.


So, those are some of the basic things you can do to offset your tax liability by having your very own business. A lot of people do these things, and it serves them very well. Performing these things could actually allow you the lifestyle of someone make nearly $100,000/year for the taxes of someone who makes $40,000/year, or less. That is a very compelling difference. Further, you can do this even if you keep your full-time employment elsewhere. However, what if you really begin doing well in your business and you take it on as your full-time employment, and you want to do even more?


One of the things I have been looking into is setting my children up for success. Part of that success includes paying for their education. But, I would also like to teach them the value of money, how to save for their future, and how to run their own business, as well. Well, when you children reach the magical age of eight, and you run your own business, you can hire them to work in your business. I have written about this before in Saving for Retirement: The Younger the Better. Essentially, you can hire your children to work in your business, and you do not have to pay many of the employer related taxes that you would have to pay for normal employees. These include the FICA match, FUTA, etc. Further, your children do not have to pay FICA, and up to the standard deduction, they do not have to pay income taxes. So, for up to the standard deduction, everything that you pay your children is entirely tax-free to you and your child, and you can deduct it as a business expense, which lowers your AGI, possibly putting you in a lower tax bracket, again. What can be done with this great tax free money? You can put it into Coverdell ESAs and Roth IRAs. The real great thing with these is that you use after tax money to fund these accounts, and the earnings are tax free. Since your child did not pay any taxes, up to the standard deduction, this is tax free money for life! The annual limit for each of these, for each child, would be $2000 for the Coverdell ESA and $4000 (in 2006) for the Roth IRA. Your child will be the first kid on the block with a retirement account! The money in a Coverdell ESA can be used to pay for education expenses, but must be spent by the age of 30. The principle in a Roth IRA can be withdrawn, without penalty, after five years, and can be used for anything. Beyond that, the earning can be withdrawn, without penalty, for education expenses. That means you have $6000 a year to work with for each child. This can be a primary way for them to fund their education. Further, they can use the principle from the Roth IRA to pay for a home (or at least a nice down payment), and anything else can get them a substantial head-start on saving for retirement. I have three children, so this can add up to a very large sum each year. If I could do this for each child, this year, then I could lower my AGI by $18,000 this year alone. However, my oldest child will be turning eight next month, so we will just be getting started, and I could yet benefit from $18,000 lower without not being able to meet the cost of my family's lifestyle (which is pretty low).


I was reading IRA Contribution Workaround on Five Cent Nickel, and he came up with a very creative way to get around the $4,000/year limit of IRA contributions. I see it from a slightly different perspective, and I commented on it in his post. Whenever you contribute to a 401(k) or a Traditional/Roth IRA, you are paying some taxes on it. You may not realize it, but your funds run through FICA taxes before they get the benefit of avoiding income taxes. Employers like the idea of giving a match on 401(k) because it is a nice benefit they can give you that costs them less, dollar for dollar. Why? You do not pay FICA on this money, which means they do not match it. So, Five Cent Nickel suggests using a SEP-IRA to get around the $4,000 limit. I say, use the SEP-IRA, and forget the Traditional/Roth IRA, unless you meet the SEP-IRA limit. Why? Because you can contribute to it as an employer, and the employee part of you does not have to contribute. This means that 100% of it avoids the FICA and the FICA match! Later on, you can roll it over into a Traditional/Roth IRA. And with all the tax savings you get already, you could stand to take the hit on rolling it into a Roth IRA. So, you can begin saving for your retirement with even greater advantages than before, and this again lowers your AGI.


I am not a tax professional, so you would need to verify the specifics to your own satisfaction, which may mean consulting a tax professional. However, these concepts can allow you to keep more of the money you earn. Taxes are the number one expense we incur here in America. That is something that I find outrageous. We fought for our independence with unfair taxation as a stimulus, and we are still taxes an outrageous amount. However, do not forget that you will still be paying a considerable amount of taxes anyway. There are property taxes, sales tax, embedded fuel tax, vehicle registration tax, and some user fees. As Americans, we should pay as little in taxes as we can legally pay. We should be responsible for ourselves, and we should help others. If we get to keep more of our own money, that gives us greater flexibility in doing all of those things. Why would you want to let the government do it for you? Just stop by your license branch and see what a bang up job they are doing there.



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