September, 2009 | Provident Planning

Archives For September 2009

Lower Your Taxes: Contribute to a Health Savings Account

Corey — September 21, 2009

Uncle Sam says, If you qualify, making a contribution to a Health Savings Account (HSA) can help you lower your taxes. You could save anywhere from $300 to $2,000 on your federal income taxes! You could save even more if your employer allows you to make pre-tax contributions because you won’t pay FICA taxes (Social Security and Medicare). Here’s what you need to know:

What is an HSA?

An HSA is a tax-exempt account designed to pay or reimburse you for certain medical expenses. If you qualify, contributions are deductible up to a specific limit. Also, you do not pay taxes on the earnings in your HSA. Distributions for medical expenses are also tax-free.

Do You Qualify?

To be eligible for an HSA, you must meet these requirements:

You must be covered under a high deductible health plan (HDHP) by the first day of the last month of your tax year (usually December 1).

You must have no other health care coverage. (Excluding worker’s compensation, coverage for a specific disease or illness, coverage for a fixed amount per day of hospitalization, accidents, disability, dental, vision, or long-term care)

You must not be enrolled in Medicare.

You cannot be claimed as a dependent on someone else’s tax return. (This applies even if the other person chooses not to claim you.)

The definition of a high deductible health plan (HDHP) depends on whether the coverage is just for you (self-only) or for your family. The definition also changes every year because the limits are increased for inflation. For self-only (single) coverage in 2009, an HDHP must have a minimum deductible of $1,150 and maximum out-of-pocket expenses of $5,800. Those amounts go up to $1,200 and $5,950 in 2010. For family coverage in 2009, an HDHP must have a minimum deductible of $2,300 and maximum out-of-pocket expenses of $11,600. Those amounts increase to $2,400 and $11,900 in 2010.

Your employer or insurance company should be able to tell you if your health insurance qualifies as an HDHP. Check with them if you’re confused.

How Much Can You Contribute?

The next thing you need to figure out is how much you can contribute without incurring any penalties. If you’re single, the contribution limit is $3,000 ($3,050 in 2010). If you have family coverage, the contribution limit is $5,950 ($6,150 in 2010). If you are over age 55, you can contribute an additional $1,000 (does not increase in 2010). If you’re married, you’re both over age 55, and your spouse has his/her own HSA, then you can each contribute an additional $1,000 (to your separate HSAs). (If only one of you has an HSA, you can’t contribute an extra $2,000 even if both of you are over 55. You can only contribute an extra $1,000.) So you’ll be able to contribute anywhere from $3,000 to $7,950 in 2009.

When to Contribute

You can make contributions to your HSA until April 15 of the following tax year (just like Traditional and Roth IRAs). So if you want to make a contribution for 2009, you have until April 15, 2010 to do so.

What Can You Use Your HSA For?

Technically, you can withdraw money from your HSA for anything. But you’ll have to pay taxes plus a 10% penalty on withdrawals for anything other than qualified medical expenses. You don’t pay taxes on qualified medical expenses. To determine what is and is not a qualified medical expense, you’ll want to check out IRS Publication 502. In addition to the medical expenses outlined in Pub 502, you can also include non-prescription medicines, premiums for long-term care insurance, premiums for health insurance under COBRA or while you receive unemployment compensation, and premiums for Medicare if you’re over 65 (excluding supplemental and Medigap policies).

Even if you won’t have any qualified medical expenses this year, an HSA could be a valuable tool during retirement. Think of it as an IRA for medical expenses. If you’re young, setting aside $1,000/year or so in an HSA for your medical expenses in retirement could be a great way to reduce your taxes now and get tax-free withdrawals in retirement. If you’re nearing retirement, maxing out your HSA would be a great way to accomplish the same thing.

Don’t Forget to Claim the Deduction!

You’ll need to make sure you claim your deduction for HSA contributions on your federal income tax return. You’ll take the deduction on line 25 on Form 1040, and you’ll need to attach Form 8889 as well. (Or you can just tell your tax preparer.) But unless you’re able to contribute to an HSA using pre-tax contributions through your employer, you won’t get any benefit at all if you don’t claim the deduction!

More Free Tax Saving Tips!

If you want to learn more ways to (legally) reduce your taxes, sign up for free updates to Provident Planning. It’ll only cost you a minute of your time, but you might just learn how to save yourself hundreds or thousands of dollars!

In Taxes

Emergency Fund – How Much Is Enough?

Corey — September 18, 2009

Over the last two weeks, we’ve looked at why you need an emergency fund and where you should keep your emergency fund. Today, we’re going to talk about how much you should save in your emergency fund.

There’s a wide range of advice out there regarding emergency funds. My approach is designed to be simple, straightforward, and safe enough to cover most emergencies. If you feel like you should save more or less than I recommend, then do what works for you.

Base It on Living Expenses

When figuring out how much you’ll need in your emergency fund, you’ll need to know your monthly living expenses. This should include everything you’ll have to keep paying if you lose your job. The budget items you’re most likely to drop are income taxes and savings. If you want to keep up your monthly savings, then include that in your living expenses. It would be best to include monthly savings, but it’s always something you can shoot for later.

To figure this out, you’ll need to have created a budget. If you haven’t done that yet, you’ll need to work on making your budget. Don’t worry – it’s not complicated. Don’t think you can get around it either – a budget is a powerful tool that you’ll need to do this, to see where you can save the most, and to figure out how much you should save for retirement.

Essential: One Month of Living Expenses

You absolutely must have at least one month’s worth of living expenses saved in an emergency fund before you do anything else – even paying off high interest debt. Why? It’s not going to do you any good to pay off your credit cards if you’re going to have to use them again to cover your emergencies. The very first step you need to take in getting your financial house in order is to save up at least one month of living expenses. Throw everything you can at this goal – earn more, spend less, and sell your extra stuff if you need to. After you’ve taken care of your high interest debts, you can push toward a larger emergency fund and other goals.

Milestone 1: Three Months of Living Expenses

Once you’ve got your debt under control, your next emergency fund milestone should be three months worth of living expenses. This gives you a large enough cushion to withstand a job loss if you can find another job fairly quickly. It will also help you cover car repairs, some medical bills, and other small to medium sized emergencies. If you’re married and you both have stable jobs, you might feel comfortable stopping here. If you’re single, married with one income, self-employed, or have an unstable job, you’ll want to keep going.

Milestone 2: Six Months of Living Expenses

An emergency fund with six months worth of living expenses should be large enough for most people. You’ll have plenty of time to find a new job in most scenarios. However, you might want a larger emergency fund if the economy looks bleak or if you are single or married with one income and you have an unstable job or you are self-employed. In those cases, I’d recommend going for a larger emergency fund.

Milestone 3: Twelve Months of Living Expenses

If you’re self-employed or have an unstable job and you rely on only one income, you’re going to want to play it safe and save up twelve months of living expenses in your emergency fund. This will help you make it through rough patches in your career when profits are down or you lose your job. This would also be a great idea if you or your children have medical needs that require large payments at unpredictable intervals.

Adjust for Your Situation

If you feel that your situation doesn’t fall into one of these specific categories, then use these as guidelines and save what you feel you’ll need. This guide should help most people get close to the right sized emergency fund for them. Don’t get discouraged if you feel like it’s a lot. Attack this goal in small steps and you’ll quickly make progress. If you have questions, just leave them in the comments and I’ll try to help!

In Saving, Stewardship

New Covenant Giving: Give Joyfully and Cheerfully

Corey — September 17, 2009

We’ve looked at giving yourself to God first, giving in response to Jesus’ gift, giving with sincere desire and love, giving under grace instead of a commandment, giving as much as you are able or even more, and giving so that there may be equality. The next aspect of New Covenant Giving we’ll look at is giving joyfully and cheerfully. God wants us to give with joy. He desires a sacrifice of giving accompanied with a right heart. Our giving does not please Him if we do it only because we feel that we must.

Joy in Christ Produces Sacrificial Giving

Contentment and joy in Christ lead us to sacrificial giving. When we put Christ first and seek God’s kingdom we break the control of materialism and greed over our lives. Once our lives revolve around serving God completely, He is able to make the power of His Spirit abound in us. It is only then that we can truly produce the fruit of the Spirit. The grace of generous giving will abound in us when we find joy in following Christ and view our lives in light of eternity – when we realize that our eternal life is much more important than this life.

It was in this way the Macedonian churches were able to give so generously – even beyond their ability. Their abundant joy in Christ led them to give much more than anyone could have expected. This is the power of God at work in Christians.

¹ Moreover, brothers, we make known to you the grace of God which has been given in the assemblies of Macedonia; ² how that in much proof of affliction the abundance of their joy and their deep poverty abounded to the riches of their liberality. ³ For according to their power, I testify, yes and beyond their power, they gave of their own accord, ⁴ begging us with much entreaty to receive this grace and the fellowship in the service to the saints.

2 Corinthians 8:1-4 (WEB)

Without the overflowing joy of Christ we cannot give with God’s generosity. We cannot expect sacrificial giving from someone who does not have the joy of Christ living in them. Their life is still rooted in this world, and they will value earthly treasures above heavenly treasures. Even the most profuse gift from them will be meaningless because they will be giving out of the wrong motives. In fact, unless we give out of joy our gift does not even please God.

God Loves Cheerful Giving

God doesn’t want us to give because we feel we must. He wants us to give cheerfully – out of love and joy. That is why Paul tells the Corinthians that we should give as we have decided in our heart:

Let each man give according as he has determined in his heart; not grudgingly, or under compulsion; for God loves a cheerful giver.

2 Corinthians 9:7 (WEB)

God doesn’t want us to give because we know we should. God doesn’t want us to give generously to try to please Him. He wants us to love from a pure heart and to find our joy in Him. He knows that sacrificial giving will follow a true sacrifice of the self. This is why He has said:

For I desire mercy, and not sacrifice; and the knowledge of God more than burnt offerings.

Hosea 6:6 (WEB)

This idea is so important that Jesus quoted this same Scripture when he replied to the Pharisees who were so careful to observe the Law but did not have God’s love in them. We must find our joy and contentment in Christ before we try to change our outward ways. Only when that is true can we please God with our giving.

Learning Contentment

If you find yourself struggling with contentment in Christ, I highly recommend you check out my free e-book Contentment Is Wealth. You’ll learn why we should seek contentment and power it can have in our lives.

In Giving

How to Invest for Retirement: Asset Allocation

Corey — September 16, 2009

If you used the free retirement calculator I created, you should know how much you need to be saving for retirement. Your next step is to actually start investing for retirement. Before you do that though, you’ll want to determine your asset allocation – how your investments will be broken down among stocks and bonds.

I have a simple rule to help you determine your broad asset allocation. Just take 120 and subtract your age to determine what percentage you should have in stocks. If you’re 25, you’ll want 95% in stocks. If you’re 45, you’d want 75% in stocks. And if you’re 65, you’d want 55% in stocks. Following the 120 minus your age guideline will keep your portfolio aggressive enough to grow while you’re young but safe enough to make it through bad years during retirement.

Why not the 100 minus your age or the 110 minus your age rules? Because they’ll give you a retirement portfolio that won’t be able to support your withdrawals and keep up with inflation. If you were going to retire at 65, you’d only have 35% in stocks using the 100 minus your age rule (45% with the 110 rule). It’s also not aggressive enough to give you the growth you need while you’re young.

Using the 120 minus your age rule will help you grow your money while you’re saving and beat inflation while you’re in retirement. But it also gives you a nice balance between risk and reward. Having 55% in stocks at age 65 isn’t too aggressive, but it’s enough to support your withdrawals and beat inflation while helping to protect you from bad markets.

I’ll be posting an article soon about how to invest in a diversified portfolio through Vanguard, and this 120 minus your age guideline will influence how you invest. If you don’t want to use Vanguard, you can still use this rule in your other accounts. Sign up for free updates if you’re interested in learning how to invest in a diversified, low-cost portfolio!

In Investing, Retirement, Stewardship

The Mortgage Interest Deduction: It’s Not as Good as You Think

Corey — September 15, 2009

The fact that mortgage interest is tax deductible has long been touted as one of the great benefits of home ownership. But it’s important to look at the mortgage interest deduction for it’s true benefit instead of simply assuming you’re getting a real tax benefit on all the interest you’re paying.

The Standard Deduction vs. Itemized Deductions

Home mortgage interest only gives you a tax benefit if you can itemize deductions. You’ll only want to itemize deductions if your total deductions are greater than the standard deduction. The standard deduction for 2010 is $5,700 if you’re single and $11,400 if you’re married. If your itemized deductions are less than those amounts, you’ll just take the standard deduction on your tax return.

Why does this matter? You’ll always have the option of taking the standard deduction – even if you never pay a thing that could be itemized (mortgage interest, property taxes, excessive medical expenses, etc.). Since you’ll always get the tax benefit of the standard deduction, itemized deductions only provide tax savings to the extent they exceed the standard deduction.

Here’s an example. Let’s assume you’re married and your marginal tax bracket is 15% (adjusted gross income between $16,700 and $67,900). If your total itemized deductions are $14,000, you’re not getting a true tax benefit of $2,100 (15% of $14,000). Even if you didn’t itemize deductions, you would have been able to use the standard deduction of $11,400. To calculate how much your itemized deductions are really saving you in taxes, you must first subtract the standard deduction – leaving you with $2,600 ($14,000 – $11,400) in this case. That means your itemized deductions are only giving you an additional tax savings of $390 (15% of $2,600).

When you’re talking about the potential tax savings of mortgage interest, you need to consider your standard deduction. If your mortgage interest combined with other itemized deductions isn’t going to push you over your standard deduction, then you’re not getting any tax savings at all. But even if it does, your tax savings should only be calculated based on how much your itemized deductions exceed your standard deduction. Before you let a Realtor or banker convince you of the great benefits of being able to deduct mortgage interest, make sure you take a close look at how much you’ll actually save.

Looking at your itemized deductions this way, how much are you actually saving on your mortgage interest? Let me know in the comments!

In Stewardship, Taxes

To Live without a Budget, You Must First Live within One

Corey — September 14, 2009

I’m going to make a confession. Although I recommend you create and use a budget, my wife and I don’t actually follow our budget. In truth, that’s not a confession because I have nothing to feel guilty about. Why? Because we have our spending under control. We’re not big spenders and we don’t buy on impulse. Our savings, giving, and bills come first. We live easily on the rest because we control our money.

I hope you, too, will be able to say the same someday. But until your spending is completely under control and you have laid a firm foundation for your finances, you need to make and stick to a budget. You can live without a budget, but first you must learn how to live within your budget.

I made my first budget when I was 15 years old. I was a very independent teenager and paid for the things I needed on my own (aside from the very basic necessities). No one taught me how to create a budget. I just understood the simple math that I cannot spend more than I earn or I’ll be in trouble. At that age, credit and loans were not an option, and I’m grateful that’s the mindset I grew up with. I learned to stick to my budget very carefully – down to the last dollar. If I spent too much money on one thing, I adjusted for it somewhere else. And I always made sure my important expenses were covered first.

This discipline of budgeting, tracking my spending, and sticking to my budget carried over into college. I had more money now, but I still had to be very careful how I spent it. Credit cards became an available option, and I hate to say that I did make some mistakes. For the most part, I stuck to my budgets very well. However, I did end up coming out of college with about $5,000 in credit card debt.

When I graduated, I made paying off my credit card debt my top priority. I promised myself I would pay it off in that first year out of college. I made a new budget and carefully watched my spending so I could put any extra money toward paying off that credit card debt. Because of my dedication, I paid off all my credit card debt in less than 10 months. I even managed to save about $3,000 in an emergency fund over that same time period! I learned the value of keeping a tight rein on my spending and avoiding impulse purchases.

After that experience of living within a tight budget, I found it much easier to control my spending. I still have a budget, but I no longer find the need to track all of my spending carefully. I look it over from time to time, but I don’t have to track every penny. Because I can control my spending and say “no” to impulse buys, I can easily live on what’s left over after my savings, giving, and bills.

You can do the same, but not until you have control over your money. If you can’t say that your spending is completely under control and your savings, giving, and bills come first, then you need to keep sticking to your budget.

Even when you’re able to live without a budget, you should still keep updating your budget every year. Why? Because it helps you see where your money is going and where you can save on your expenses. It’s also a valuable tool for figuring out how much income you’ll need in retirement. Do everything you can to get yourself to the point where you don’t need to stick to a budget any more. But do not neglect making or updating a budget just because you don’t have to follow it down to the dollar.

If you’re struggling to save anything, find yourself using credit cards to pay for essentials, or just can’t control your spending, sign up for free updates to Provident Planning so you can learn how to stick to a budget and find power to control your money through contentment in Christ.

In Budgeting

Where to Keep Your Emergency Fund

Corey — September 11, 2009

If you realize you need an emergency fund and you’re ready to get started, the first thing you need to do is figure out where you’re going to keep it. Will you stuff it in your mattress, put it in a savings account at your local bank or credit union, or open a high-yield online savings account?

The Problem with Your Mattress or Local Bank

Inflation will eat away at the value of your emergency fund unless you’re earning enough interest to beat it. The problem with keeping your emergency fund under your mattress or in your local bank is that they don’t provide enough interest to beat inflation. You’ll get no interest from your mattress, and banks are notorious for savings account interest rates of 0.05% (maybe 0.50% if you’re lucky). If you want to earn a decent amount of interest, you’ll have to look elsewhere.

Consider a Credit Union or High-Yield Online Savings Account

Credit unions and online banks offer far higher interest rates than banks. And online banks often offer a higher interest rate than credit unions. If you are able to join a credit union, find out what kind of interest rate they offer. Then, compare it to an online savings account to find the best deal.

I Recommend ING Direct’s Orange Savings Account

My wife and I have our emergency fund and all of our short-term savings with ING Direct in their Orange Savings Account. I highly recommend ING Direct to my family and friends, and I strongly encourage you to consider using them for your emergency fund. ING Direct has all the features you’d normally expect including automatic transfers, free electronic transfers, and free bill pay. I have five specific reasons I recommend them over everyone else:

Customer Service – ING Direct is known for its excellent customer service. You can quickly reach a knowledgeable Associate by calling their customer service number (1-888-464-0727). They’re available 7 days a week from 8 AM to 8 PM (EST). I’ve always received friendly, prompt, and helpful service from them. I’ve always talked to a real person in less than a minute when I called.

Easy to Use – ING Direct has a simple user interface with plenty of help available if needed. It’s straightforward and easy to learn. And if you ever get stuck or have a question, you can get help quickly by calling their customer service number. (And you won’t be stuck waiting for 20 minutes to talk to someone.)

Consistently High Interest Rates – ING Direct is consistently among the highest interest rates in online savings accounts. They don’t always have the top rate, but they don’t bait you in with a promotional rate and then rip you off later. I like knowing that I’m getting a competitive rate all the time.

Security – When you sign up for a savings account with ING Direct, you’ll see why they’ve received top marks for their security features. They are one of the most secure banks you can use. They take security seriously and it shows. The New York Times had a piece showing that ING Direct has the lowest rate of identity theft among the top 25 banks in the U.S.

Multiple Accounts – It’s very easy to open multiple savings accounts at ING Direct. A couple clicks and you can have an account specifically for your insurance bill. You can then set up automatic transfers to that account so you’ll be ready when that bill comes. I have an account specifically for our heating oil bill because we only pay it in the winter and it comes in large chunks ($400-600 a bill). This is a very useful feature for budgeting and segregating your savings so you can see your progress toward specific goals.

Opening an Account at ING Direct

Opening an Orange Savings account at ING Direct is very easy. Go to their website at www.ingdirect.com and click “Open an account”. Then click “Orange Savings Account”.

After clicking the “Open Now” button and reading the instructions, you’ll be taken to their short application. It should take you less than 5 minutes to fill out all the forms. You’ll just need to have your checkbook handy so you can link your ING Direct account to your checking account.

In one or two business days, you’ll receive two small deposits in your checking account. Log in to ING Direct to confirm those deposits, and then you’ll be able to withdraw from ING to your checking account. They’ll let you deposit to ING from your checking account even if you haven’t confirmed those deposits.

Free Updates!

I’ll talk more about how much you should save in your emergency fund, ways to build it up, and when you should use it. If you don’t want to miss that information, sign up for free updates to Provident Planning!