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See How the Other Half Lives

I was recently invited to a charity auction at my niece’s school. It was a nice event. There was a silent auction, a nice dinner, and a live auction featuring dinners at places I’ve never been. Oh yeah, and there was a open bar, supposedly to facilitate the aforementioned auctions. After being surrounded by so many wealthy people for an evening I joked to friends afterwards that I “got to see how the other half lives.”

But the truth is this: I am the other half.

No, I don’t have a million dollars. I drive a 14 year-old car with battle scars. I could go on and on about the things I don’t have. In fact, the list will grow much faster than I could actually type. That’s the kind of world we live in. But I do have a house, a job, three square meals, and two (count ‘em, two!) cars that get me where I want to go. Most important, I have a wife and two young kids who love me far more than I deserve.

There was a recent survey by Fidelity Investments, which found that 42 out of 1000 millionaires don’t feel wealthy. I shook my head when I read this statistic. How could they be so greedy?

But this editorial by Kevin Winge put me in my place. I am the greedy one. He tells the story of “the other half” with a narrative about a man named Bandile who lives in a suburb outside of Cape Town.

Bandile lives in a two-room house. The front room serves as a living room and kitchen and is constructed of concrete. The bedroom that was added on in the back is made of zinc and poorly constructed. Holes in the ceiling let in rain and holes in the walls let in the cold and the rodents. Bandile lives with two adult cousins. The two oldest men share the only bed in the house and the younger one sleeps on an old sofa in the bedroom. When you visit, the three roommates will all sleep in the bed so you can have the sofa.

As you may have gathered, Bandile’s place isn’t a B&B. You won’t have a bed to sleep in and there won’t be breakfast either. There was no food in Bandile’s house when I stayed with him. I mean no food. Not a slice of bread. The lack of food made me curious about what the rat found to eat in the house. There must have been something under the sofa I slept on because I heard it scratching and gnawing throughout the night.

Don’t worry, you don’t really see the rat. Bandile has only one lamp and that is in the other room. There is no light in the bedroom so it is very dark, which makes for good sleeping until rays of light begin to shine through all of the holes in the walls in the morning.

I know the statistics about how my wealth places me in the top 10% of the world population. (At least.) But when I read or see something like this, it hits a spot in my heart that no statistic can touch.

Count your blessings and extend someone a helping hand today.

What are the Key Lessons You Took from the Financial Crisis?

They are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle…Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don’t ever know what’s going to happen…

- Warren Buffett

What Does the Health Care Plan Mean for Me?

If you’ve opened a newspaper in the last year, received a forwarded email, or had the TV on during a news program, you have received some information about the health care reform discussion in Congress. Frankly, most of what I’ve read has either been light on details or just plain false.

Everyone seems to agree that the current system is broken, but there doesn’t seem to be much agreement over how to fix it. My parents and their siblings are reaching the age where they’re looking at health care expenses. Our young family is healthy, but for various reasons, I am very interested in the movement away from employer-based health care.

The Christian Science Monitor has put together a great series on what the final bill means to you. I like how it simplifies the issues in terms of how it affects you. It has a piece that discusses just about every “type” of health consumer.

Health Care Reform 101

Comcast Digital Cable Transition

Now that the FCC has successfully moved America off the analog broadcast TV spectrum onto digital TV, Comcast is mustering the will to turn off their analog customers and force everyone to upgrade to digital cable. I’m surprised how long it’s taken them to come to this, considering that switching to all-digital is in their best interest. But I’m sure they did not want to get caught up in the negative press surround the air signal transition.

Here are the interesting details of their plan:

  1. The lowest cost plan will continue at the same price.
  2. They will transition the entire Twin Cities area by the end of 2010, starting in western Wisconsin and moving west. We should be in-line by fall.
  3. Each household will be eligible for three FREE digital adapter boxes. Even if the TV is equipped for digital, they are required one each TV.
  4. The basic plan will include 15 channels not currently on the analog basic plan. They mention PBS Sprout, which is very popular around our house.

Since our promotional price runs out later in the spring, we’ll be downgrading to the basic service then. It’s nice to know that we’ll lose a few fewer channels than we expected. I’m curious to hear if any readers have moved to basic broadcast TV + Internet around their house. I will share more about our journey as we move along. This transition will force the issue for us. And hopefully save us quite a bit of money in the process.

Use Online Resources for Tax Preparation

When the calendar turns over to each new year, I am anxious to get started preparing my tax returns. But since many of the necessary forms do not arrive until January 31st, I am stuck waiting until February to start preparing my tax returns.

This year, I developed a checklist that uses some online resources to help with my tax preparation. Getting an early start will help in two ways:

  • Either I get my refund early.
  • Or I know I need to pay.

I started by ordering income tax preparation software I’ve used software to prepare and efile my tax return every since since 2000. I’ve used TurboTax, Tax Act, HR Block Online, and to finally arrive at HR Block At Home (formerly TaxCut). It’s inexpensive, high quality, and has good higher-end options without pressuring you too much into buying them.

Early Tax Preparation

In January, before you receive all the forms you’ll need, you can use several online resources to help prepare your taxes. This year, I can use portals for my bank, my payroll, my mortgage service, and even my health insurance. Looking up data online can save time over rifling through piles of papers, especially for onerous tasks like sorting through health insurance claims.

The numbers you’ll need:

  • Payroll service – check the last pay stub of 2009 for your YTD gross income and tax deductions. I also need my 401k YTD contributions because my state considers this taxable income.
  • Mortage service – check the transaction history for 2009 to summarize the interest you paid on your mortgage. If your real estate taxes are paid through escrow, get those numbers here.
  • Health insurance – the portal for my health insurance company (United Healthcare) lets me download my claims history for 2009 into a csv file to easily summarize my medical expenses. The list was not comprehensive, but it saved me literally hours of data-entry time.
  • Bank – in addition to the interest you were paid last year, some other numbers to look-up are charitable contributions, property taxes (if not paid through escrow), additional 2008 tax payments made in 2009, and vehicle and personal property taxes. There may be more depending on your situation.

Take advantage of the down-time in January to tackle some of the more menial tax preparation tasks. I filed for extension in 2008 because I put off these projects until the last minute. They can take quite a while, so the earlier you get started, the sooner you can deposit that refund check.

  • Itemize material deductions like donated clothes, furniture, books, CDs, etc. Use an online resource like Deduction Pro (through HR Block) to estimate your deductions based on the type and quality of the item.
  • Mileage for charity. This is a decent deduction for our family. My wife and I are both serial volunteers and deducting this mileage is important. We don’t keep a mileage log, but we do keep a calendar. Using Google Maps and your calendar, you can figure out your mileage very quickly.
  • Itemize health care expenses. If these exceed 7.5% of your AGI. It seems like these receipts are floating all over the house. Even though I could download my claims history, there were a lot of health-related transactions that I’ve found receipts for. This deduction is not for everybody. Your expenses must exceed 7.5% of your adjusted gross income (AGI).
  • List your brokerage transactions for the year, including any dividends and capital gains. This could potentially add a lot to your tax burden, so better to tackle it early.
  • Make a checklist of the forms you’re waiting on, like W2s, interest statements from your bank, and 1098 from your mortgage company. Make sure the numbers you’re coming up with match those official documents before you file your returns.

Finally, take a couple minutes to lay a better foundation for your 2010 tax returns. I’m always organized about my taxes in the two months while I’m filing but things fall into disarray the rest of the year. The key for me is to make filing as simple and fool-proof as possible. A great filing system isn’t working if you can’t remember or don’t have the time to follow it. So I create two simple “buckets” for the next year.

  1. Create a file folder for all tax-relevant forms and dump everything in there as it comes in.
  2. Set-up online expense tracking to automatically categorize and consolidate your bank and credit card statements. makes locating deductions and tax-relevant transactions very quick.

The more you get ahead of the ball on your income taxes, the less stress you’re going to feel as April 15th approaches.

2010 Roth IRA Conversions

In January 2000, I resolved to start taking charge of my finances. After a couple years of working, I had a small 401k balance but financially, it was easy come easy go. I had no plan. I didn’t even have a savings account!

I sought out the advice of a financial “advisor”. And by “sought out”, I mean called an advisor based on a tip I got from my buddy at a bar. To make matters worse, the tip involved this cool “universal life insurance policy”. It sounded like a great deal at the time. I was sober. But not smart.

To the credit of the financial advisor, he did teach me a little about the difference between traditional and Roth IRAs. I had heard of a Roth, but did not understand why it was such a useful tool. The entire experience, and the losses I suffered as a result of our transactions, are what led me to the decade of financial education I’ve pursued since.

The biggest mistake I made that year was to convert my 401k to a Roth IRA. The rule of thumb I wish I knew then was this: if your tax rate is lower now that you expect it to be in the future, convert to a Roth. The year he converted my 401k, I was in the 35% tax bracket. For the last few years, I’ve been in the 15% bracket. This mistake made my small retirement egg even smaller. Thousands of dollars smaller.

A recent column by Robert Powell outlines a few pitfalls to avoid when converting to a Roth IRA. Among them are mistakes I made:

  • Failing to understand the tax consequences
  • Converting when your tax bracket is likely to fall
  • Forgetting to consider a recharacterization

The income limitations for conversions were lifted which makes 2010 a great year to convert. If you’re out of work or took a pay cut last year, it’s a good time to convert. If you accept the notion that you are paying lower taxes today than you ever will again, it’s a good time to convert. And if circumstances change, you can always recharacterize your conversion by April 15, 2011.

I’ve had good luck with my Roth IRAs at Vanguard and Wells Fargo. Vanguard is renown for their low costs and Wells Fargo offers 100 free brokerage trades in their IRA accounts if you have a PMA checking account.

Luckily, I made my mistakes early in life and I will have plenty of time to recover. But I’m still better off today than I’d be if I had done nothing at all. Take your first step today.

When Banks Compete, You Win

Delta airlines recently became the world’s largest airline by acquiring Twin Cities based Northwest Airlines. One curious fallout from the merger has been the competition for airline credit cards. Minneapolis based US Bank issued the Worldperks credit cards for Northwest, and Delta issues their Skymiles cards through American Express. As their prior agreement was dissolved by the merger, US Bank chose to switch their credit card holders to a competing flexible miles program. Cardholders who did nothing were issued new cards and were automatically enrolled in the Flexperks airline miles program. American Express is aggressively advertising to convert Worldperks members over to the Delta Skymiles card.

In order to grab these customers away from US Bank, American Express keeps sweetening the deals.

  • The offers started with 20,000 miles to new cardholders. Apply for the card, make a purchase, and collect almost enough miles for a free flight.
  • The offer got sweeter when they added a 5,000 mile bonus if you added two additional card-holders. I can easily add my wife, but I’m not sure who else I would add? My 3 year old? Maybe if I had teenage children this would make more sense.
  • Then they added a 10,000 mile bonus if you spend $15,000 on the card in a year. This equates to a 1.66% bonus considering that you already get 1 mile per dollar.

Some drawbacks to jumping on these offers:

  • Slight hit to your credit score by applying for more cards.
  • The miles are locked into Delta. Seeing as how they are the largest airline in the world, this should be okay to most people, it’s especially sweet to those living in the Twin Cities, Atlanta, Memphis, Detroit, etc. where they are the largest carrier in town.
  • The miles expire after 24 months under the Delta program. They have announced that they will automatically extend any Worldperks miles an additional 24 months when they switch these into the skymiles program. Great for us that don’t fly very often.

If you’re thinking about air travel sometime in the next 24 months, it might be worth looking into these deals.