Is Refinancing Always a Bad Thing?

I was listening to a sermon about finance a few weeks ago and when the speaker referenced people who manage their money poorly, he mentioned how “they just keep refinancing…”.  I realized then that a lot of people might have a misconception about refinancing, assuming it’s always a bad thing.

When someone with poor money management skills is refinancing their home, they are most likely doing what’s called cash-out refinancing.  This means they are taking cash out of the value of their home and using it to pay down other debt (i.e. credit card debt), while starting a new loan on their home.  I found a great explanation of how cash-out refinancing can propel someone further into debt on Investopedia:

Many homeowners refinance in order to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring with it an automatic dose of financial prudence. In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again – the possible result is an endless perpetuation of the debt cycle and eventual bankruptcy.

Sometimes refinancing is a lot more justifiable like when you need to pay for your child’s college tuition or a large medical bill.  And sometimes refinancing can even be a good thing like when you use it to lower the interest rate on your mortgage.  Investopedia does a great job of summarizing When (And When Not) to Refinance Your Mortgage.  So take a look when you get a chance!

IRA Phase Outs (aka when you make too much money for IRAs)

A lot of us millennials are familiar with putting money into a Traditional or Roth IRA for retirement savings.  When we first started working, contributing the max amount ($5,500 for 2014) into an IRA was nearly impossible for us and our entry-level salaries.  But as we work our way up the corporate ladder, we will start to experience “rich people problems” such as making too much money for IRAs.  Let me explain…

First, you have your Traditional IRAs.  For someone who is single (for tax purposes), the phase-out for 2014 begins at $60,000 and ends at $70,000.  What this means is that if your Adjusted Gross Income in 2014 is $60,000 or less, you can deduct the full amount you put into your Traditional IRA (on line 32).  If your AGI is $70,000 or more, you can’t deduct anything that you put into your Traditional IRA.  And if your AGI is somewhere between $60k-$70k, you can deduct part of the amount you put into your Traditional IRA.  Fidelity has a simple calculator that you can use to see how much of a deduction you can take.  Click “yes” under the Employer-Sponsored Plan section if you have a 401k with your employer.

Next, you have your Roth IRAs.  For a single person in 2014, the phase-out begins at $114,000 and ends at $129,000.  The reason why the phase-out limit is so much higher for Roth IRAs than Traditional IRAs is because with Roth IRAs, you do not get an immediate tax deduction regardless.  That’s just not how Roth IRAs work.  So the phase-out is for whether or not you can even contribute to the account and if so, how much.  If your AGI is $114k or less, you can contribute up to the max ($5,500 for 2014).  If it’s $129,000 or more, you can’t contribute anything.  If you fall within the phase-out range, you can contribute up to a specific amount.  You can use the calculator provided above to see what that amount is.

And lastly, you have your Non-Deductible IRAs.  There is no phase-out for Non-Deductible IRAs because it works like a Traditional IRA without the immediate tax benefits.  This IRA is appropriate for people who have an AGI over the phase-out limits for both Traditional and Roth IRAs but still want to take advantage of the tax-free growth.  So even though you don’t get to deduct your contribution on your tax return, you still don’t have to pay taxes on your account’s earnings each year.

Guest Post #2 from Aaron – Via Negativa

In Aaron’s second guest post, he shares how he gets rid of his excess stuff and how he maximizes credit card rewards.  Enjoy!

From Aaron:

I hope everyone had a great holiday season! If you’re like many Americans, you probably got a bunch of gifts.  A bunch of stuff.  We all have too much stuff.  The concept of “less is more” in reference to physical goods had always floated around in my mind but just a few days ago Art of Manliness actually came out with an article fleshing out that idea.

From that article, “Via negativa is a Latin phrase used in Christian theology to explain a way of describing God by focusing on what he is not, rather than what he is; understanding Deity’s positive qualities is a task deemed impossible for the finite minds of humans.” The article goes on to list things like bad habits, toxic relationships, and stupid decisions as negatives in your life you should negate.

In my own fiscal interpretation of Via Negativa, I see the benefits as two-fold.  First is the negation of a negative, resulting in a positive.  And second, is the resulting simplification of your stuff which brings peace of mind.  Here are a couple examples:

  • Smoking has got to be one of the most fiscally irresponsible things you can do to yourself.  According to the American Lung Association, the average retail cost of a pack of cigarettes is $5.51, but the cost to society and the state’s economy (and your health) is $18.05 per pack.  PER PACK.  By getting rid of this bad habit you save plenty of cash, time, and most importantly, health.  I’m glad most of my friends don’t smoke.
  • Morning cups of coffee add up real fast, in both dollars and calories.  I know people that get a cup of Starbucks every single day.  At ~$5/cup, 50 weeks of coffee adds up to $1250 a year in post-tax…coffee.  That’s about how much my entire 10 day trip, including flight, accommodation, 5 day hike, food, etc to Peru cost me.  Moreover, once you start adding sugar and creamer, those things pack calories. You need to walk an entire football field length to burn off a single four calorie m&m.  Have fun with the new 180 calorie flat white.
  • Finally, if someone is using self-storage, they quite literally have too much stuff.  I don’t think I need to go into too much detail with this one, but Rick Warren, the pastor of the megachurch Saddleback, who by the way has paid back all his past earnings as a pastor, and now tithes 90% of his earnings, once asked something along the lines of “do you know why I never have to worry about scraping the barnacles off my yacht or where to garage my sports car?  Because I don’t have either of those!”

I’m sure there are plenty of other examples.  Lately I’ve been selling a bunch of stuff on eBay and Amazon.  A bunch of old useless stuff lying around my place that I don’t use anymore that is.  eBay takes a little more effort, but they take a smaller cut.  I like Amazon because you list your items, pack all your junk in a box, ship it to Amazon, and they take of all the warehousing and shipping from thereon out.  They even offer Prime shipping on your items.  Declutter and simplification while making money? Sign me up!

I view holding a bunch of cash, touching cash, and spending cash as bad.  One way to remove this bad (and make money that I teased about in my previous post) is by using credit cards!  Just the other day I had a meal with a friend.  To pay, she pulled out a debit card and upon learning she didn’t own a credit card, I immediately berated her for all the free money she was missing out on! Let me explain.  At minimum, credit cards give you 1% cash back, meaning for every dollar you spend, you get one cent.  If you spend just $15,000 a year for the next 50 years on your credit card, you’ll have spent $750,000.  1% of that is $7,500, tax free! I personally hope to spend a lot more than $750,000 in my entire life.  This is the easiest scenario.  If you’re willing to diversify a bit and spend just a little brain power managing a couple more credit cards, here’s what cashback I get:

  • American Express Blue Cash Preferred: 6% CB on groceries (you can buy giftcards, including Amazon gift cards at the grocery store =P) and 3% on gas
  • USbank Cash+: 5% on two categories of your choice
  • Citi Double Cash: 2% on everything
  • US Airways Dividend Miles: (Shameless plug that I get 10,000 miles for referring someone) 50,000 mile sign-up bonus which is enough for one international round trip flight or two domestic round trips.  There is an $89 annual fee, so simply cancel the card after you get your miles. $89 to fly anywhere in the world? WORTH IT.

There are people out there that go even further with this and manage to pay rent, utilities, etc with their credit cards and other blogs begin talking about time value of money and more complicated things like that.  Try searching “manufactured spending” if you’re interested.  I personally don’t spend too much time doing manufactured spending, but I do always offer to put a group tab on my card and collect cash later.  I get credit card rewards and never need to go to the ATM!

Not only do you earn tax-free dollars and free flights from credit card usage, but it simplifies your record keeping (it’s all electronic, automatic, and often times includes spend-analysis tools), and it reduces your liability!  If you’ve ever lost or had your wallet stolen, that cash is gone.  When you use a credit card to buy things, you don’t have to touch dirty money, and cards often have added benefits like extended warranty, extended return period, price protection (if the price of something drops after you buy it), car rental insurance, and so much more.  If you’re not happy with a purchase, complain to your credit card company; they’ll take care of you.

Via negativa: remove the bad and thus increase your good.


Click here to see Aaron’s first guest post!

Good Personal Finance Reads

Tax Information You Need to Know for 2015 (Gen Y Planning) – Great tax tips that are easy to understand.

Tax-Free IRA Rollover Done Correctly – Here’s How (Wealth Pilgrim) – If you’ve left a job recently and had a 401k there, you’ll need to roll the account over to an IRA at some point.  This blog post gives you simple instructions on how to do so without paying taxes and penalties.

10 things you’ll pay more for in 2015 (CNN Money) – Guess I won’t be going to that Taylor Swift concert after all.

2015 Financial Goals

I wanted to write and publish this post before the new year began but failed, obviously.  You’d think that being the avid list-maker and goal-oriented person that I am, this post would’ve been one of the quickest and easiest for me to write.  Au contraire!  I’ve been drafting and redrafting this post for a week!

My writers block is most likely caused by the fact that I don’t have anything to cross off my financial “to-do list” at the moment.  I don’t have any consumer debt or student loans to pay off.  I don’t have any major purchases lined up.  And since I’ve been saving for retirement, I can’t say this is the year I’m finally going to start.

After mulling over this for a few days, I’ve decided that my financial goals for 2015 will be adjustments to how I’m already spending/saving.  For example, I’ve increased the amount of money I give to church and my mom every month and plan on sticking to this new amount for the rest of the year.  I’ve also increased the amount that gets taken out of each paycheck for my Roth 401k.  An expense I’m aiming to decrease this year is the amount I spend on work lunches.  I learned the hard way (read: painful stomach aches from lack of fresh food) that my “solution” for saving money on work lunches isn’t much of a solution at all.

What about you?  Have you figured out your financial goals for 2015?

Calculate Your Estimated Tax for 2014

Most of you should have received your last pay-stub for the year by now.  My coworker sent me this link from the IRS website that you can use to estimate the amount of taxes you overpaid/underpaid in 2014.  A lot of the information you need for the calculator is on your last pay-stub so have it handy!

The goal is to get as close to zero as possible (no taxes owed or due).  A lot of people get excited when they get a large tax refund.  But that excitement is actually misplaced because when you overpay in taxes, you’ve given the government an interest free loan.  In other words, the government got to borrow your money for free.  If you had put that extra money in a CD at your local bank, the bank would have at least paid you interest when they gave you your money back, even if it is only 1%.  And if you had put that extra money in an IRA or 401k, you could have taken advantage of compounding interest and probably would have gotten an even higher return, much much higher (the S&P is up 8.5% YTD as of 12-17-14).

Of course, you also don’t want to withhold too little and end up owing a lot in taxes come April.  At best, it’ll take a chunk out of your savings account.  At worse, you won’t have the money set aside to pay for it.  Then you’re really in trouble.

Breaking perfectly even in the amount taxes owed/due is nearly impossible, so just try to keep the difference less than a few hundred dollars.  Using the calculator linked above helps a lot.  Of course you could also talk to a CPA to get even more accurate estimates.  If you see that the amount owed/due is over a couple hundred dollars, talk to your HR department about adjusting your withholding accordingly.

Money Making Tip: Selling Clothes on eBay

A few years back, I tried selling a top on eBay.  The process was so complicated that I gave up after only a few minutes.  It wasn’t until I met my coworker, an eBay pro, that I decided to try again.  Since my second attempt, I’ve sold about 20 items of clothing and made over $200!  I know $200 isn’t enough to quit my day job or anything, but it’s still pretty awesome considering the fact that all the items I’ve sold would’ve gone to Goodwill anyway.  Plus, the best part of selling on eBay for me is getting rid of so much unworn clothes.

The time it takes me to photograph, upload and post an item is less than 5 minutes now.  Even though it’s so easy, I know a lot of people still think it’s too complicated to try so here are my tips for an eBay beginner:

When you sell, use the quick listing tool.  As soon as you click the “Sell” button on top, it should automatically take you to the quick listing tool.  But just in case it doesn’t or you accidentally click on the advanced tool, you’ll know to switch it to the quick listing tool.

The instructions for title, condition, photos and item specifics are all pretty self-explanatory.

Once you get down to the Details section, write a few things that the buyer may want to know about the item like if there are any stains or missing buttons.  Sometimes if there is nothing particularly worth mentioning, I write something like, “only worn once!” or “great with leggings!”

I like to list my items for Auction with a starting price of at least $3.  I’ve sold items for $0.99 before and believe it or not, those are the items that I never get paid for.  This has happened to me 2 out of 2 times.  I feel like with a $3 minimum starting price, people who bid on the item are much more committed and likely to pay up.  After setting the Auction starting price, I select the Buy It Now option and put an amount typically 2 or 3 times the starting Auction price.

For the Listing Duration, I like putting 3 days so the turn-around is quicker.  After the Listing Duration, you can schedule your listing’s start time.  If you don’t check that box, your listing will be live as soon as you click “List it” at the bottom.  I like to schedule my start time for 7:30am because that means the auction will end at 7:30am 3 days from now.  I can check eBay that morning and if there was a bid on the item, I’ll bring that item to work with me for shipping.

Shipping is, for me, the tricky part.  From my experience, eBay does a good job 90% of the time estimating how much postage costs to ship your item.  But when they’re wrong, it can be costly… for YOU.  For instance, there was one top I sold that eBay thought weighed 6 oz or something like that, which means the buyer paid $2 for shipping.  Once I tried to ship it, I found out the top actually weighed 14 oz.  This was a problem not only because it was much heavier, but also because it surpassed the weight limit for First Class shipping (13 oz).  So then I had to ship it Priority Mail, which cost me over $7.  My net profit for that sale was less than $1, which was disappointing but at least I didn’t lose money!  From then on, I try to estimate the weight myself and probably even over estimate by an ounce or two just to be on the safe side.

Last thing, don’t be surprised if after a month after your first sale you get an email from eBay saying you have a balance.  Ebay charges a seller’s fee but it’s not too bad considering you won’t get charged a seller’s fee unless you’ve made money from a sale.

And that’s it!  You’re ready to list your first item!

For those of you who are eBay veterans, I’d love to hear some of YOUR selling tips!


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