If you want to teach your kids a good life lesson about money, here you go! The next time your kid loses a tooth and places it under his or her pillow to get the riches they deserve for selling a body part on the black market to a mythical creature, be sure to take out taxes, college savings, tithing (if religious), and retirement.
I "kid" (pun intended) you not, when they tell you about how they got money under their pillow that night be sure to inform them that they owe you money for that income. Take out payroll taxes, withholding taxes, unemployment taxes, and any state or local taxes that you may have. You're probably looking at around 35%. They should be saving for retirement at 10-15%, along with the same amount for college, so make sure that's put into a savings account for them (your pocket). Tithing is generally around 10%, but maybe you can tell them that this is tax deductible. Or maybe they'll feel better if they drop $1 of their fairy money in the dish on Sunday? The best part about this is that you can now keep this money, because like the federal government, the tooth fairy is a mythical creature, except it takes rather than gives. Now here is the really fun part! The next time you do this, look to see if they tell you about the money or if they just keep it. This might be an insight into their future character (keep your fingers crossed). If they don't, ask them where the money is. If they lie to you, just show them the W2 that the tooth fairy left with him. My kids are going to be soooo screwed up! "Like" if you think I'm a jerk...
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Why a Health Savings Account?
With big chunks of Obamacare taking effect at the beginning of 2014. You will be required to have health insurance or face a penalty. This may be a good way for all people, especially young healthy ones, to minimize their tax bill and also get the cheapest insurance. I went on the exchange recently and yes it still sucks. It took me over 4 hours to sign up and get a quote, but I was at least in the end able to find a price before it froze. The cheapest ones will most likely be the high deductible (like all insurance) which many times will qualify it for an HSA account. Assuming you're in a 25% tax bracket you could save around $825 a year in taxes. This money grows tax free and also can be withdrawn tax free for medical expenses like paying for Medicare premiums! BOOM droppin' knowledge! Let's take a look at the difference between Dave Ramsey's "debt snowball" and what a rational accountant would advocate when concerning paying down debt. One of Dave Ramsey's financial "inventions" is his advocacy of the "debt snowball". What is this and how does it work? Well the snowball analogy is like that of the asset snowball in that, as you pay off more, the more you're able to pay off. Hence it rolls down hill gathering momentum. Your mortgage actually works like this. The difference in the amount of debt you pay off in the first 10 years of your 30 year mortgage and the amount you pay off in the last 10 is staggering. So here's an example of how it works: Credit card 1: $5,000 at 12% Credit card 2: $10,000 at 17% Credit card 3: $15,000 at 15% Under Ramsey's debt snowball, the underlying principle is that you pay off your debt balances with the smallest amounts first. Why? It's a psychological trick to keep you on track. You see that you're making progress. So in the example above you would pay credit card 1 off first, then 2, then 3, only in that order. This is counterintuitive to a mathematician or in this case an accountant. This method would give a CPA brain hemorrhage! Why? Because under the Ramsey method it's going to cost you more money to pay it off than his way. Under his method you always pay off debt starting with the highest interest rate first. This is because it is costing you the most money, so you need to wipe it out first. How much would you save via this method? Well everybody is different, but let's use the scenario above. Assume you get a hair up your ass and start throwing $1,000 a month at the debt on top of the minimum payment, then it would take you 27 months to pay off via the account's way and it would take you 28 months via Dave's debt snowball.
Whoop-dee-fucking-doo! 1 month is nothing! Especially when you take into effect that under the accountant's method you are less likely to finish at all. In case you can't tell, I'm in favor of the "debt snowball" rather than the conventional thinking. You are much more likely to succeed when you see progress, rather than having to see it all happen at the end. Have you ever tried to lose weight?? So focus on amounts, not interest rates. If you have a few credit cards with a $1,000 on each, then a car loan for $5,000, then another credit card for $10,000, then student loan for $30,000 and finally the mortgage for $150,000. Go after it in that order! Don't be afraid to mix and match. There are some specific exceptions to this rule given each person's unique situation, but it's a good rule of thumb to follow. |
AuthorThis website was created due to the atrociously misguided financial advice that I've heard over the decades. Financial freedom is not intellectually strenuous, but it takes discipline. Categories
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