Feed The Pig

I saw an advertisement at the mall last week with this scary looking pig:

I will feast upon your soul!

Turns out, the ad was for the financial education website FeedThePig.org. The site is run by the American Institute of CPAs (AICPA) and has a goal of educating Americans between the ages of 25 to 35 to take control of their finances.

There are lots of free tools on the site, such as checklists and financial calculators, as well as links to podcasts put out by AICPA.

The site is designed for those who have next to no knowledge of financial topics and is divided into four main sections:

Getting Started

Managing Your Money

Credit & Debt

Planning Ahead

Each of those pages gives you some basic information about the topic in question as well as links to checklists to achieve a specific goal. For example, on the Plan Ahead / Major Purchases page, there are links to a couple of goals you might have:

Selecting one of those will take you to a checklist of steps to take to achieve that goal, broken out into steps to take immediately, over the next year, and over the next several years.

The site doesn't have any options for you to plug in numbers or track your progress - it's more of an educational site and not a goal tracking site.

Mostly Good Recommendations

I found the site to have generally good recommendations. When it comes to paying down debt, they recommend the debt avalanche method of paying the minimum on all your debts except for the one with the highest interest rate and sending all extra payments to that until it is paid off, then moving on to the one with the next highest interest rate, etc. As this method results in the lowest amount of interest paid, it's the recommendation I would expect from a CPA.

The only thing I saw that I disagree with was the recommendation that Step 1 for investing is to hire a professional financial adviser, such as a CPA. Given who runs the site, this isn't a surprising recommendation, but I don't think it's the first thing that someone needs to do before investing. To be fair, they do say that if you have the time and energy, you can educate yourself rather than hiring someone, so this is just a minor quibble.

All in all, this is a decent site for those new to money topics or those looking for a place to start taking control of their financial life. Assuming the pig doesn't scare you away.

Taming Taxes

I can’t say I completely dread April 15^th. For one thing, it’s my brother-in-law’s birthday, so it’s not all doom and gloom. But finding out if I’ll get a tax refund or if I will owe money does make me a bit anxious. See, I’m one of those who believes that getting a big tax refund means you have actually lost money. You’ve given Uncle Sam an interest free loan for a year, which coincidentally means you lost the opportunity to invest that money and have it work for you. My goal, therefore, is to end up owing something like $200 to $500 come tax day – an amount small enough to pay without too much pain, but still not a refund.

For 2014, I failed miserably in this goal. We ended up owing $1,400 federal and $900 state taxes. When I found that out, I made some changes to our withholding rates. I had my wife change her withholding to the “married, but withhold at the higher single rate” level. I also had an additional $90 tax per month withheld from our combined paychecks. I didn’t know how much more the single higher rate would take, but the additional withholding added another $720 per year to our paid taxes. (I made the change at the end of April, so it only was in effect for 8 months). In theory, that should at least cut the federal tax due in April in half, assuming we would owe a similar amount in 2015. I also made an estimated tax payment of about $250 in August. Those two things together meant we withheld at least $970 MORE for our 2015 taxes than we did for 2014. I thought that would ensure our tax bill would be lower this April.

Epic fail.

The tax gods laughed at my feeble attempts to tame them. For 2015, we ended up owing $1,900 in federal taxes! That’s more than we owed the previous year, even though we were having more taxes withheld. The good news was that we got a $400 refund from the state. (The bad news is that we had to pay $400 to our CPA to do our taxes. Goodbye, refund!)

What happened?

In looking at my tax return, it seems there were three factors that resulted in a larger tax bill for me this year: online course sales, stocks, and lack of a tax credit.

Online Course Sales

My online course sales are reported as self-employment income. This means I have to pay not only my income tax, but also the Social Security and Medicare tax that is normally paid by the employer. In 2015, I had roughly $4,000 in self-employment income, which was higher than the year before, so that resulted in a larger tax bill.

Stocks

I invest my money in stock, particularly Realty Income stock. Realty Income has structured their business as a real estate investment trust (REIT). This provides the company with tax advantages but it also means its dividends to shareholders are taxed as ordinary income and subject to the higher ordinary income tax rate rather than the lower dividend tax rate that dividends from a non-REIT company would incur. Additionally, Realty Income’s stock experienced a large increase in value in 2015 and I sold my shares to move my funds into a hard money loan. That meant a big capital gains hit for me – almost equally split between the higher short term capital gains rate and the lower long term rate.

No 2015 Tax Credit

In 2014, I received a tax credit of a couple hundred dollars whereas in 2015, I did not. I have forgotten what this was for. It might have been from improvements related to an energy audit I had done, although my blog post at the time said the applicable tax credits had expired in 2013. Truthfully, I don't really care enough to go back and dig through my old tax returns to find out what exactly the credit was for because tax forms, amiright? I'm just content to identify that this was a contributor to the difference between last year and this year.

Going Forward

Look, I’m not complaining about paying taxes. The reason I owe more taxes this year is because I made more money. I’d be foolish to complain about that. And I’m not complaining about paying taxes in general. I live in this country and expect to pay my share for the benefits all Americans enjoy. I drive on the roads and interstates; the police and fire department will come whenever I may call; I fly in and order things transported by planes directed by federal air traffic controllers; I have collected unemployment benefits when I’ve been laid off. No, I’m not complaining about taxes. I’m complaining about how absurdly complicated the system is and how hard it is to make a coherent budget for them. When people end up owing taxes, the amount they owe is usually a complete surprise. The entire amount must be paid by April 15^th, so there’s not really a good way to spread the payments out over time (short of paying by credit card, which will end up costing you more in interest charges).

How I’m Handling This

Once again, I’ve modified my tax strategy in an attempt to prevent another huge tax bill next year. I increased our additional tax withholding amount from $90 per month to $250. That forced me to make some adjustments to our budget, which mainly involved cutting back on the amount we were saving from our paychecks towards the Tesla (*sniff*) and a replacement for my wife’s car.

(You can specify additional tax to be withheld from your pay on line 6 of your W-4. Note that the figure you enter here is a per-paycheck amount, so this much will be withheld each time you are paid.)

In order to compensate for self-employment tax, I’ve decided to save 15% of each month’s course earnings and send it in quarterly as estimated tax payments. The self-employment tax rate is 15.3%, which is comprised of a 12.4% Social Security tax and a 2.9% Medicare tax. However, the employer portion of that amount (which is half) is tax deductible. That’s a deduction, not a credit, however, which means it reduces your taxable income, not your tax owed. So if your tax rate is 28%, you get back 28% of that 50% of that 15.3%. Yeah, taxes are stupidly complicated.

Anyway, by just sending in 15% of each month’s income, I should cover the self-employment tax and the increased additional withholding should cover anything else. I'm hoping that come next April, everything will be sunshine and rainbows!

What Should You Do With Your Tax Refund?

So you're getting a tax refund, huh? Great! For many people, a tax refund represents "extra" or "found" money that they didn't plan on having. (In reality, it's simply their own money being returned to them after the government borrowed it interest-free the previous year, but that's another discussion...) In 2015, the average tax refund was over $2,800, which is a significant amount of money. It can be tempting to spend that money on hookers and blow something fun, but if you are reading this blog, hopefully you are looking to be a little more financially savvy and are wondering what a better use of that money might be. Well, let me give you some ideas. I'll list them in order of importance.

First, Treat Yourself

Look, it's human nature to want to spend newly found money. Until you do, doing anything else with that money will be hard, so give in to temptation a little bit. The key here is a little bit. Spend no more than 10% of your refund or $50, whichever is less. Do whatever you want with that money - go out to lunch at a fancy restaurant, buy that new video game you wanted, get that Tesla tattoo, whatever. Now, with that out of your system, let's move on.

Start Your Emergency Fund With A Bang

If you don't have an emergency fund, take this opportunity to start one. Put that money into a savings account. Consider that your emergency fund seed. Now, water that seed by adding some more to it every week or two weeks. One dollar, five dollars, ten dollars. Whatever you can afford. Better yet, set up an automatic transfer to this account with your bank so you don't have to think about this ever again. That's like installing an irrigation timer to keep your money tree growing. Eventually, you'll end up with a nice sum of money and you'll no longer live in fear of an unplanned emergency wiping you out.

Pay Off Debt

If you've already got an emergency fund established, good for you! The next option is to use your refund to pay down some credit card debt, if you have any. My recommendation is to apply it towards whichever credit card is charging you the highest interest rate, but if your refund is enough to completely pay off a balance, you may want to send it to that card instead. Whatever floats your boat. The important thing is to also stop running up those bills. You just paid down the outstanding balance; don't go out and run it back up again, dumbass!

Fund Your Retirement

Saving for the future typically always gets put off. It's hard to deny yourself money today for money twenty or more years in the future. Since your refund is money you probably weren't planning on having, saving it for your future self will seem like less of a loss to your current self. If you have an IRA, deposit your refund into that. If you don't have one, use your refund to open one. Depending on how close or far you are to retirement, your refund could increase tenfold or more by the time you retire. Your future self thanks you.

Add To A College Fund

If you have a kid, put the money in his or her college fund. (Yes, fund your retirement before a college fund.) If you have more than one kid, put it in the college fund of your favorite one. Just kidding. Split it however you want.

Invest It

If you've made it down this far in the list and still haven't used up your refund yet, congratulations! You're in pretty good financial shape! You could always be in better shape, however! (Look! Lots of exclamation marks!) Invest your money in a low-cost mutual fund. Perhaps start an account to save for a Tesla. Then pat yourself on the back for being so smart.

Goal Update: End of March 2016

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of March, 2016
Current value: $22,063
Change from last month: +$950
Percent of Goal:  20.29%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

Income this month from my online courses was the highest ever - $597! It will be interesting to see what the next couple months bring because Udemy is changing their pricing. Previously, you could set your course price to be pretty much whatever you wanted. If you opted in to their promo program, Udemy would then promote your course with various coupon codes, which could be up to 90% off your list price. Beginning April 1, they are now limiting the price of a course to $50 and coupon codes, both from Udemy and instructors, will be limited to 50% off.

Two of my courses were priced over $50, but I've adjusted all of them to be a lower price now. I don't think there will be a huge impact on my revenue - most of my sales were at a big discount from the list price already. The 50% discount limit might actually result in a slight increase in my average sales price. In any event, it'll be June before I start getting payments for courses bought under the new pricing scheme.

After selling my stock last month to move into a hard money loan, I've started purchasing more again to build up another $20,000 for the next loan. I bought some more of my favorite stock, Realty Income (O) at $59 earlier in March. I still think that's somewhat pricey (and it's close to the 52-week high), but at that price, the dividend is still giving me a 4% return. That's the minimum return I'm looking for. The price continued to rise the remainder of the month and on the last day of March, it closed at $62.51 - a new 52-year high. Crazy high, if you ask me. However, as I mentioned in my post on dividend investing, no matter what the price does, I'm still going to be earning 4% on that money.

Two Milestones

There were two milestones reached this month. First, I hit 20% of my goal, so I unlocked a new achievement!

(Click For Explanation)

The second milestone was reached by Telsa. They unveiled the Model 3 at the end of the month. There were long lines at the local Tesla showroom of people waiting to place a deposit. This is amazing considering the car won't be shipping until 2017.

The line outside the Tesla store in Scottsdale Fashion Square

Last month, I posted my net worth figure. I've since been added to Rockstar Finance's Ultimate List of Blogger Net Worth Page, so I'll start reporting this figure monthly. At the end of March, our net worth hit another milestone:

That's an increase of roughly $21,000. This mostly came from stock appreciation in our various investment and retirement accounts. If there is any interest, I can start blogging more about where that number comes from - our income, expenses, assets, etc. (I use Mint.com to track the details.) Let me know by leaving a comment or dropping me a note using the contact page. As a reminder, if you have any questions or suggestions for topics, you can also contact me!