Can’t Pay Taxes, It’ll Cost You

I think it’s safe to say that most of us don’t like filing income tax returns and writing big checks every April but you know what they say about dying and paying taxes – you can’t avoid them.

If you don’t pay what the IRS says you owe it’ll end up costing you a lot more than your initial tax bill. When you skip out on your taxes, there are some fairly harsh penalties.

Even if you know you can’t pay what you owe, you are better off filing a return and working with the IRS than just ignoring the problem and skipping taxes altogether.

Penalties and Interest
When you don’t pay your taxes, the penalties and interest start to add up. The IRS will levy penalties against you, and start keeping track of interest. The interest starts from the day after taxes are due.

So, if your quarterly taxes are due on June 15, the IRS will start charging you interest from June 16. The longer you wait to pay your taxes, the more the interest and other penalties add up. Coming up with the money to pay these penalties and interest is even more difficult than finding the money to pay the initial amount owed in the first place.

It is also important to remember that there is a similar process when you skip your state income taxes. Your state will also have its own penalties and interest charges. So, if you don’t pay your federal taxes or your state taxes by the tax return deadline, it could get very expensive really fast.

Failure to File a Tax Return
Many people believe that, if they can’t pay their taxes, there is no reason to file a return. This is not true at all. In fact, the penalty for failure to file is rather hefty. It’s more than some of the penalties for not paying taxes.

If you don’t file your tax return, you will be subject to an even bigger penalty. Ignoring your tax problem won’t make it go away. In fact, the longer you wait, the worse it gets.  You can access most of the best tax software for consumers online.  There are ways you might be able to find some tax software discounts and in some cases you can file your taxes online for free.

Working with the IRS
The IRS actually offers you the chance to pay your taxes using an installment payment plan. You don’t have to pay all at once if you can’t afford to. As long as you owe less than $25,000 in taxes, penalties and interest, you are usually eligible to apply for an installment plan.

You can even do this online at the IRS web site . As part of the application process, you tell the IRS how much you can pay each month, and the IRS reviews your situation and determines whether or not to accept your proposal. You should realize, though, that the installment plan is, in fact, a loan.

You will have to pay a one-time fee for origination, and you will pay interest. However, the interest that you pay is likely to be better than what you would pay if you used a credit card, or got a payday loan. And, by setting up an installment agreement, you can avoid paying some of the penalties.

If you are willing to show that you want to pay your tax obligation, and you make an effort, in many cases, you will be able to get some help in making the whole situation a little more affordable.

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Your Financial Goals 2012

Did you ever notice that life often doesn’t go as planned?  When I first envisioned a financial goals system I had an idea of what the first topic would be but after asking you what your money goals were for 2012, it wasn’t at the top of the list.

Here are your financial goals for the coming year. 

Most of the goals are pretty self explanatory except for “Other”.  I grouped all the goals that only had a few votes into the “Other” category for the purpose of the summary. Of course, that doesn’t mean they’re not as important as the goals that got thier own slices in the pie chart, just that more people shared the other goals.

As a reminder, here’s a snapshot of all the goals that you had to choose from.

Some people did write in their own goals, which was awesome, because obviously not everyone has the same money objectives in 2012.  I liked reading those because it gave me some insight into what other money topics you have on your mind.

Committing to Action

Thanks to everyone who shared their financial goals!  About 27% of everyone who looked at the survey answered it, so if you don’t see your goal sufficiently represented here, make sure to leave your vote next time.  I think one reason not as many people wanted to vote for their major financial goal was that I required you to include your email address when voting. That’s kind of what I expected, and in a way was hoping for.

I think it’s easy to check a box and click Submit for a goal but I think leaving your email address was more of a comittment towards that goal.  I want to work with people who are serious about hitting their goal and I think we have a good core group of people who responded who are ready to take some action.

Paying Off Your Credit Card Debt

Based on the results above, the first financial goal project will be on paying off credit card debt!  For those of you who responded, be on the lookout for an email from me in the next few days about how to get started.

If you didn’t get in on this round of the project, you can sign up below for my email newsletter for future updates.

Email:

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Best Gym Membership Deals

Gym membership deals seem to be everywhere this time of the year. We’re one month into a new year – you promised yourself it was time to get healthy as part of your New Year’s resolutions, but have you?

It isn’t too late to start now. Gyms usually see a large influx of customers in January as we all promise to get healthy and fit every year. If you’ve waited until now you can still get a good deal, and the crowds will be slowly going down moving further into the year. You’ve missed part of the “resolution rush”.

Join the Right Gym
Before you can start looking at gym memberships you need to know what you are looking for in a gym. Do you want to run on inclined treadmills? Are you interested in a wide variety of classes (aerobics, spin, etc.)? Are there specific weight-based workouts you are looking to do?

All of these factors determine which gym is the right one for you. If you’re looking to take a wide range of classes and you pick a gym that doesn’t offer many classes, you’ve lost. And you’ve probably locked yourself in a long contract to boot!

Gym Membership Deals
Once you’ve picked out the type of gym you need you can start comparing offers from gyms in your area. Here’s a look at what some national gym chains are offering:

Bally Total Fitness: $27.99 per month, pay first and last month, plus a $29.00 card fee. No long term contract and access to 300+ fitness centers around the world. You can also use Bally coupon codes to save $5 off enrollment.  At one point you could get a Bally discount if you were a recent college graduate.  You can also get a Bally free trial to test out the gym with their 7 day guest pass.

Gold’s Gym: Promotions vary by gym. For example, One location in Murfeesboro, TN offered $14.99 per month memberships with no contract; a gym in New Bern, NC offered memberships at $29.99 per month with $21.54 in start up costs and a 2 year contract. That’s a huge difference!

Gold’s Gym also offers a 7 day VIP pass that gives you a golds gym membership trial to see if you like it.

Curves: Each location is a franchise so promotions are laregely determined by the owners. Many do have a Curves deal where new members get a week free as part of their “Wildly Effective Week” promotion.

24 Hour Fitness: $29.99 per month and you can use 24 hour fitness coupon codes for a $0 initiation fee. In addition to the 24 hour fitness free trial for 14 days, they also offer coupons for 30 or 90 day non-member offers.

Local Gym Deals

You won’t want to forget local gyms either. “The Rush!” is a somewhat regional chain in the southeast with locations in Tennessee, Georgia, and North Carolina. Their New Year’s special is $1 per day ($30 per month) with no up front costs. My local YMCA offers a single adult membership for $49 with a $30 join fee, but the family membership is only $73. If you had multiple people using the membership your cost per person drops dramatically.

As you can see it really pays to shop around to find the best gym. Prices for no-contract memberships seem to range in the $28 to $30 per month range. Going on contract might save you money in the long run, but only if you use the gym heavily.

Most every gym out there offers a 7 day free membership pass to get you to try the gym out. The hope is you’ll get enough out of they gym during those seven days (when your motivation to work out is highest) that end up joining at the end of the week.

Compare Gym Costs and Perks
Once you’ve narrowed your list of prospective gyms down, it’s time to try them out. Use the 7 day pass, but commit to not committing until you’ve tried out every gym on your list.

After you’ve tried all the gyms it is time to get down to negotiating and comparing the costs with the perks. You’ll need that list of things you thought were important in a gym from earlier.

Did you use any of the classes like you thought you would? If so, the gym that costs $1 more per month but has three times as many classes as other gyms is probably worth it. If you didn’t, then a gym like that might not make the final cut.

Narrow the list down to two target gyms, then call them up and ask for the best deal. Better yet go in person and tell them you’ve got an offer from one of their competitors and want to see if they can beat that deal. You’ll get a lot of fluff about why they are better than the competitor, but remember you’ve already narrowed down to two gyms that you would be happy to join. It’s all about dollars and cents now.

Don’t Forget Corporate Discounts
Fitness centers have smartly teamed up to offer discounts to employees of corporations in their areas. Corporations are looking to cut back on their healthcare costs, and employees that regularly go to the gym are likely to be healthier than if they didn’t go to the gym. It’s a win-win for the employer and the gym.

For example, some corporate wellness programs will give you a 24 Hour Fitness discount code that you can enter into their website to save money when you sign up, as shown here.

These relationships can also be a win for the consumer, but only if you do your price shopping. The corporate discount at one gym may be more expensive than the rate you could negotiate to at a different gym. Either way it is a good place to start as you try to make your selection.

It’s not just corporations that get in on the gym discounts, some government organizations offer them as well.  For example, the New York Department of Education has a partnership that earns Golds Gym discounts for all of it’s employees.  And at one point Curves was offering all Indiana State Employees Curves membership discounts at certain locations. You’ll probably need some sort of proof of employment for similar deals, usually an employee ID or recent paycheck stub is enough.

Membership Clubs

Another way to find gym membership deals is by being part of a club or organization.  For example, if you have a Costco membership you can get a 24 Hour Fitness discount by buying a year or two at a time.

Or you can get a Golds gym deal if you’re a member of AARP – a discounted enrollment fee and discounts on monthly membership costs.

So, as you can see there are multiple ways you can save money on a gym membership.  Before you signup, check out the deals and see how much you can save.

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How To Squash Your Nagging Money Worries

Do you ever go to bed at night worrying about money?  If you’re anything like my wife then some of those worries can keep you tossing and turning all night long. 

The simple answer to get rid of those worries is to tackle whatever concern is nagging at the back of your mind.  Unfortunately, life’s not always that simple.  Whether it’s work, family, school, or other responsibilities – life is busy and it’s tough to make time to get things done.

Running the Rat Race

I know before we had kids, I worked long hours at my job while going back to school for a Master’s degree.  Then we started a family and I launched this site and I haven’t slept a full 8 hours since : )

I’m sure you could share many similar stories, there’s never enough time in the day to get everything done that you’d like. The crazy thing is we work hard to earn a good salary and make a good life for ourselves and our family but often we don’t make time to take care for ourselves financially.

I could be wrong.  If you don’t have any outstanding financial to-dos then congrats to you and please let me know in the comments below.  But based on everything I’ve observed in my adult life, most of us have outstanding things we need to tackle when it comes to our finances.  Like what?

• Paying Off Debt
• Creating a Retirement Plan
• Building an Emergency Fund
• Creating an Estate Plan
• Buying Life Insurance
• Rolling Over a 401k
• Opening an IRA
• Finding a New Job
• Creating a Budget
• Tax Planning
• Rebalancing Investments
• Saving Up For a Big Expense

It’s a long list that I bet you could add something to.  My point isn’t to make you feel bad about your outstanding items; in fact, my goal is to help you get them done.  Let me explain with a quick story.

My Late Night Struggle

I don’t remember exactly which night it was but I had a long day at work, dealt with a sick kid when I got home, and then had a conference call until almost midnight.  As I sat down to work on my “master plan” for this site I felt frustrated and discouraged.  I was tired and spent, I didn’t have the time or energy to tackle this big task.  However, I knew I’d be equally exhausted the following night and the night after that.  So I told myself to suck it up and just get one thing done that evening.

Then I realized that you probably go through something similar.  In your case it’s probably not your website you’re worried about but some aspect of your finances.  You work a long day and have all sorts of responsibilities once you get home.  At the end of the night the last thing you feel like doing is working on your finances.

Why are these things so daunting?  Maybe you don’t know where to start.  You might not understand all the details.  You don’t want to make the “wrong” decision. There are lots of barriers, mental and tactical, that get in your way.

It Doesn’t Have to Be So Overwhelming

As I sat there thinking about how I should just get one thing done I realized that the same thing applies to your nagging financial worries.  You don’t have to be overwhelmed by these big tasks that you’re facing.  You can work on them a little bit regularly and get them taken care of in time.

You see my professional background is in software development and project management – I spend every day taking big problems and breaking them into little, manageable pieces.  So finally a little light bulb went off and I realized that I can use those same methods and apply them to your financial projects.

What I Built For You

If you read yesterday about how I failed you in 2011 then you’ll remember that this year I commited to creating something awesome. What I’ve built is a system that takes a financial project and breaks it down into tiny actionable pieces. It gives you the information and tools you need to complete each action and lets you track your progress as you complete them a little bit at a time. 

I’m excited about rolling it out because the beginning of the year is a time when we traditionally make our goals and start working towards things that we want to get done.  I’m in the middle of putting the finishing touches on this tool and I’m asking you to share your biggest financial goal for 2012.  Whichever one is the most popular is the goal that I’ll build into the first release of the new system. So far there’s one goal that’s beating all the others, we’ll see if it holds it’s top spot – Click hereto vote for your goal..

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How I Failed You in 2011

You’re probably looking for tips and motivation on reaching your financial goals for 2012 but I think it’s important to reflect on the year that just ended and see what we can learn from it.

I promise there will be lots of tips and motivation in the coming weeks but first I have some confessions to make.  I did fail you in 2011.  Today I’ll talk about how I screwed up and what I’m doing to fix it.

1) Adopting a Pet Panda

My pet panda wasn’t exactly invited into my life but I have learned something from the experience.  It all started at the beginning of 2011, when the search engine Google made a change to the way they sent visitors to websites.

I won’t go into all the details here but Google nick-named the change “Panda” and what it meant for me was that the number of people coming to this site everyday went down significantly. It would be kind of like if my site was a mutual fund and Google was Morningstar and they downgraded my site to just 1 star.

To say it was discouraging would be an understatement; to say it was devastating would be a bit dramatic.  However, after having written on this site for years and pouring thousands of hours of my life into it, this development certainly set me back on multiple levels.

But why does this matter to you? One thing I learned from this whole experience was that you get the most value out of focused expertise, detailed information about specific financial topics.  Sure the change was just a search engine algorithm adjustment, but it was made to reflect the desire of people like you and other web searchers who want deep knowledge – rather than shallow information.

What I mean by that is, instead of covering a wide range of personal finance topics at a high level, you get more out of a narrower focus and more in depth coverage of those fewer topics.

Does that mean I’m only going to cover one or two topics?  No, I’ll still write about a variety of things I think will help you with your money.  However, it does mean that I’m going to put a lot more time into giving you solutions for specific money problems you face.

2) Giving You Nothing Awesome

This shortcoming really comes out of the first one that I just described but didn’t explicitly name – being general and shallow.  Let me explain.

I traveled to Chicago for the Financial Bloggers Conference last fall and met a lot of amazing people.  After spending time with my fellow bloggers, having a lot of good conversations, and listening to some interesting presentations I realized that every person has their own unique strengths and benefits they can offer when it comes to money matters.

Everyone has their own perspective and individual experiences with personal finance that other people can learn from.  The application of those specific skills and experience can create something very useful for you, something awesome that can really change the way you see and use money.

I also realized that my broad approach to the personal finance wasn’t doing my experience and skills justice and was holding me back from creating something awesome for you.

Unfortunately I wasn’t sure exactly what that awesome thing was, which leads me to my next failure.

3) Lacking Clarity

So there I was, a rebel without a cause.  I knew things needed to change but I didn’t know what I could do to make the biggest difference in your financial life.  So I started doing a lot of soul searching and research.

I’m sure you noticed that in the last few months of last year I only published one or two articles a week to the site.  I’ve had several people contact me to ask if everything was okay and to offer encouragement to keep up more regular content.  Thanks to Anastasia and everyone else that reached out with suggestions and concern.

However, despite how it may seem, I’ve actually been as busy as ever on the site.  It’s just that a lot of the work has gone into this research and preparation for the next phase of Money Smart Life.  Of course, this hasn’t done you much good yet, only reduced the amount of personal finance tips you’ve been getting.

I apologize for that…. but there is good news!

A Turning Point?

I did get a bit of a boost last November when I traveled to Minneapolis for a Mastermind Session with several other web entrepreneurs.  I gained more insight into where I was and where I wanted to be with Money Smart Life. 

I also have to thank Jeff Rose of Good Financial Cents.  We met at the conference in Chicago and have had a lot of follow up phone calls in the evenings after our kids were in bed to talk about what direction our sites should head in.

After all of this soul searching, deep thought, and time spent I finally had my “Eureka” moment! Unfortunately, I can’t talk about it now because I have to run out the door for work (which is kind of a clue for my big Ah-ha). Come back tomorrow and I’ll tell you more about what I figured out and what’s coming next.

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Claiming Investment Losses on Your Taxes

As the end of the year draws near we unfortunately have to start thinking about the taxes we’ll owe, our tax returns will be due before we know it.

If you’re not aware of the possible investment tax deductions one that you should think about is investment loss – the losses that result from your investments can offset some of your income.

Offsetting Capital Gains

First of all, your investment losses should be used to offset your capital gains. You pay capital gains when you see a net profit with your investments. However, if you have investment losses in other areas, you can use them, dollar for dollar, to offset your gains.

So, if you sell an investment for a $5,000 gain, and you sell another investment and end up with a $6,000 loss, your losses completely offset your gains. You owe no capital gains tax on your increase! When figuring out whether you have a gain or a loss overall, make sure that you start off by pairing off long-term gains with long-term losses, and short-term gains with short-term losses.

This is important, since short-term gains are taxed differently than long-term gains. If you have a net loss over all, though, it makes the situation a little easier. Double check your work with the IRS or with a knowledgeable tax professional before filing your tax return.

Offsetting Other Income

In the example above, there are losses “left over” from offsetting capital gains. If you still have losses after offsetting your capital gains, you can use those, up to $3,000 a year, to offset other income. So that left over $1,000 becomes a tax deduction from your “regular” income.

But what if your net losses are much bigger? In some cases, you might find that you have $4,000 left over after offsetting your capital gains. Well, you can still only use $3,000 of your left over losses to reduce your income. However, you can carry forward losses indefinitely.

So, you can carry the remaining $1,000 to the next tax year, and use that to reduce some of your tax liability. When deciding what to sell, think into the future. While it’s a benefit that you can carry forward losses, you don’t want so many losses that you are constantly carrying them forward with no end in sight. Make sure you carefully consider your situation, and decide on a strategy that works best for you.

Selling Your Losing Investments

As you prepare to sell your losing investments and harvest the tax loss, it is important to make sure that you do it right. First of all, understand that you can’t use losses on paper. The sell transaction has to actually be complete before the end of the year if you want it offset your income.

Also, if you want to gain a tax advantage from selling your losing investment, you have to avoid violating the wash sale rule. The IRS wash sale rule is simply that you can’t buy back a “substantially identical” investment within 30 days of selling your investment.

It’s not illegal to buy back an investment within that time period, but it will prevent you from claiming your losses as a tax deduction. So, if you decide to sell, make sure you don’t re-purchase the investment within 30 days. Your losing investments can be turned to your advantage with the right strategy. Take a look at the options, and consider that you might be able to benefit by reducing your taxable income by harvesting investment losses.

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Year-End Health Moves for Better Financial Fitness

As the end of the year approaches, it’s a good idea to evaluate your health situation — especially as it relates to insurance — and make a few moves that can save you money. You might be surprised at your options, and you can improve your financial situation with a little help from some of these moves:

Change Your Health Plan

The end of the year is when many companies go through open enrollment. This means that you have the chance to change your health plan. Don’t just keep things the same because you’re too busy, make sure to review your coverage and how much you’re paying for it.

Do you really still need maternity coverage? Has your emergency fund grown enough that you can afford a higher deductible? Make sure you have adequate coverage, and look for ways to limit premium costs.

If you are in reasonably good health with few health needs, a high deductible health plan can really help you save money. Raise your deductible, and watch your premiums drop. However, you want to make sure that the additional money you pay out of pocket is affordable.

Contribute to a Health Savings Account

If you have a high deductible plan, you are usually eligible to open a Health Savings Account (HSA). You can receive a tax deduction for contributing to a HSA. This is a great way to reduce your taxable income while saving up money for health care costs.

Your money grows tax-free, and as long as you use the money in your account for qualified health care costs, you never have to pay taxes on it. (If you withdraw money otherwise, the rules are the same as a traditional IRA.) The good news is that, like an IRA, some companies let you contribute into the next year.

Check with your benefits department but to see if you have until the middle of April the following year to make contributions.

Use Your Flexible Spending Account Money

Many health insurance plans come with a Flexible Spending Account (FSA). You can put money in these accounts, and receive a tax benefit, and then use it for health care expenses. However, unlike the Health Savings Account, which rolls over year to year and grows, the money in the FSA doesn’t roll over. It’s a use it or lose it situation.

So now is the time to use that money. Make your doctor appointments, or buy needed supplies. Remember, though, that if you want to be able to use FSA money for over the counter medications, you still need a doctor’s prescription.

Start Living Healthier

Make a resolution — and a plan — to start living healthier. Your health costs will be much lower long term if you take care of yourself. Create a plan to exercise more and eat better.

Ben’s getting a head start on his health resolutions by swearing off all sweets for the holidays. While you don’t have to swear off sweets forever, you can adjust some of your habits so that you are living in a healthier manner. Also, remember that relaxation, and stress relief can be great ways to improve health.

Look for ways to make small changes to your lifestyle so that you won’t need to spend as much money on health care. Many chronic — and expensive — conditions and diseases can be controlled or avoided with the help of better health habits.

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The Best Employee Gifts

The best employee gift for me would be cash but I’ve never received money for a work gift before.  Employee gift cards would be the second best; I have gotten gift cards in the past and certainly put them to good use.  What about you, what do you think are the best employee gifts?

Employee Gift Ideas

I’m sure coming up with employee gift ideas for the holidays isn’t easy because you have to get something everyone would like but stay within your gift budget.  I’ve had years where it’s been a cheesy gift that no one really wants but I’ve also gotten some pretty nice employee appreciation gifts.

When you’re giving gifts to friends and family it’s the thought that counts but when it comes to work gifts it seems like it’s often just the gift that counts. I know a lot of employees see a cheap gift as almost an insult, they’d rather the company keep the money than spend it on a knick-knack no one really wants.

Good Gifts, Bad Gifts

If a company isn’t going to do cash or a gift card then I think practical gifts like a nice insulated mug are a good way to go.  Of course of it’s in place of an expected cash gift or bonus then you’re likely to run into the same problem as Clarck Griswold and the famed “Jelly of the Month” club gift.

One thing I’m not a fan as employee gifts are gadgets. If I’m going to get a gadget, I want to pick it out myself.  On top of that, some people may have that particular gadget already or maybe just don’t want it. It seems like a lot of money to spend on electronics that you don’t know for sure if someone wants.

Employee Gift Cards

It is hard to please everyone, which is why gift cards can be such a good option.  One reason people sometimes steer clear of gift cards is that they have fees associated with them.  If you’re buying a bunch of cards for employees you may be able to get those fees waived.

You can also look for promotions where the fees are waived, especially around the holidays. For example, the American Express gift card offers deals for no fees and free shipping. 

The other benefit of gift cards is that they’re a good last minute employee gift.  If you don’t find out until the very end of the year whether money will be left in the budget for employee appreciation gifts, gift cards can come in handy.  Of course this could mean you’ll have to pay extra for expited shipping. Or, you could just put a line item in the budget to be sure the money’s there and save on shipping costs : )

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What is a Good Credit Score Worth?

What’s a good credit score worth?

A good credit score is vital for loan approval and can help you borrow at lower interest rates.  Depending on how much you borrow a good FICO credit score could be worth hundreds or thousands of dollars.

What is a good credit score?

A good credit score falls in a range of 675 – 850, the strength of the score depends on which credit scoring system you’re using.

Good Credit Score Range

Before you get a handle on what is a good or high credit score, you first need a basic understanding of how the scoring goes. FICO, which is the primary credit score that lenders around the country use, starts at 300 and goes up to 850. A good FICO score starts at 675 and goes to 699. A very good credit score picks up at 700 and goes to 799. An excellent credit score ranges from 800 to 850.

Prior to the downturn in the economy and stricter lending guidelines, a good credit score could get you far. A good credit score could get you an auto loan, mortgage or credit card, with favorable terms and a fair interest rate. Since the downturn in the economy and the stricter lending guidelines, your credit score has to be higher to get approval from some lenders.

Journey to a Good Credit Score

The calculation of your credit score has of five components: payment history, balances, credit history, types of credit and new credit. Each component has a higher weight than the one that follows it, so these are in order of importance. If you want to boost your credit score into the good, very good or excellent category, then these five components play a vital role.

1. Payment history (35%)

The primary way to boost your credit score is always make your payments on time.

2. Balances (30%)

The second way to boost your credit score is to maintain manageable balances on your credit accounts. If all of your credit cards are at the limit, then pay down or pay off the balances. Maintaining a manageable debt level is another boost to your score.

3. Credit history (15%)

Time is on your side when attaining a higher credit score. When you have long and positive relationships with your creditors, this boosts your credit score. Avoid opening and closing credit accounts and loans. Instead, maintain your account and credit relationships.

4. Types of credit (10%)

You should also vary the types of credit accounts you have. Having a mixture of credit cards, auto loans, student loans, mortgages and store credit accounts can help. You can attain a good credit score more easily if you have a mix of credit account types.

5. New credit (10%)

Finally, establish new credit accounts once in awhile. If you do not have a combination of different types of accounts, this is an opportunity to open a new account using a new type of credit.

What’s a Good Credit Score Worth?

Your credit score may actually be used as a criteria for more than approval for a car loan or home loan these days. In some cases employers, rental agencies, and insurance companies may check your credit score before hiring you, renting to you, or writing an insurance policy for you.

The impact of these uses are hard translate into dollars since your credit score isn’t used in all cases and we don’t know how exactly its being used.  Just be aware that the value of a good credit score goes beyond approval and interest rates on loans.

It’s not simple to say for sure how your credit score will impact your loan application since there are different credit scoring systems and lenders use other criteria in addition to your credit.  One thing’s for certain, the more money you’re borrowing, the more you’ll pay in interest. So your credit score often has the biggest bottom line impact on a home loan.

You can get an idea of how much a good credit score can save you, or a bad credit score can cost you, from the credit score calculator on the MyFICO site.  Below is a snapshot of the estimated monthly payments for each credit score range on a 30 year fixed mortage of $300K.

FICO Credit Score Range	Monthly Payment	Monthly Savings
760-850	$1,520	$39
700-759	$1,559	$32
680-699	$1,591	$40
660-679	$1,631	$80
640-659	$1,711	$104
620-639	$1,815

As you can see the savings from one credit score tier to the next is significant. If you compare the best credit score tier to the worst credit scores you’re looking at almost $300 a month difference.

Bad Credit?
If you’re in the bottom tier of the table you’ll obviously have to pay a higher interest rate, which means thousands of dollars over the life of your loan. Not only that, lending requirements have tightened enough that you may not be able to get a loan at all. So how can you build up your credit history to improve your credit score if no one will give you a loan?

One of the best ways to rebuild your credit is to use a secured loan or a secured credit card.  Since the loan is backed by an asset, the lender is willing to take the risk of loaning you the money.  If you make sure the lender reports to the credit agencies (Equifax, Experian, or TransUnion) and that you send in all your payments on time this approach should help improve your credit.

How to Check Your Credit Score
If you’re not sure where your credit score stands, there are several ways that you can check your credit score.  In fact, you can get a free credit score from multiple sources online.

The FTC established a site called Annual Credit Report where you can get a free credit report several times a year.  Unfortunately it doesn’t include your credit score but there are places you can check it without paying.  Some of the sites, like Credit Karma, are free because they use a variation of the FICO score.  It may not match your FICO score exactly but can give you a rough idea of where you fall.

Of course, we’ve seen that the difference between credit tiers can add up to hundreds of dollars a year in interest expenses.  If you want to know exactly what your FICO score is then you can sign up for a free trial of several different services.  As with all free trials, if you don’t cancel after the trial is over you’ll pay a fee.

• myFICO
• Experian
• TransUnion
• Equifax

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New Mutual Fund Cost Basis Rules

Beginning January 1, 2012 new regulations set forth by the Internal Revenue Service (IRS) will take effect. These regulations affect the way in which mutual fund companies report cost basis and gains or losses for taxable accounts. The purpose of these changes is to verify what fund companies report on their tax documents and what the individual investor reports on theirs. The IRS wants your tax documents to match those of the mutual fund company whose shares you bought or sold during the tax year.

What is Investment Cost Basis?

Cost basis is simply the price you pay for a share or asset, including any sales charge that is paid. It is used to determine if you will be paying a capital gains tax or if you will be able to deduct the loss when that occurs. Cost basis also includes any reinvested dividends and capital gains distributions.

For example, if you bought 100 shares today in a mutual fund and the per share price was $20 and you were charged $10 to buy the shares, your cost basis would be $2,010. (You would also factor in your brokerage charge to sell the shares at some point in the future.) You would use this cost basis to determine if you made a profit or loss on your investment whenever the investment is sold in the future.

If you bought at $20 per share and the shares rise to $30 per share when you sell, you’ve made a profit. Your capital gains tax would be factored off of: $3,000 (100 shares x $30/share) – $10 (selling brokerage charge) – $2,010 (initial cost basis including purchasing charge from broker). Your profit would be $980 and capital gains tax would apply to that amount.

What is Changing to Mutual Fund Cost Basis Rules?

Mutual fund companies have, in the past, only reported the cost basis to the investor and not the IRS. This will change in January 2012 and cost basis will be reported to the IRS for all shares acquired after January 1, 2012 (to be called “covered shares”). Fund companies will report this information on Form 1099-B to both the IRS and the investor.

Traditionally the cost basis has been calculated using an average cost (the average price of all shares purchased). However, investors will now have the option to choose one of seven ways to calculate the cost basis.

• Average Cost -  typically the default method for fund companies; the average price for all the shares you currently own is calculated and used when your shares are sold
• High Cost, First Out (HIFO) - the shares with the highest purchase price are sold first
• Low Cost, First Out (LOFO) - the shares with the lowest purchase price are sold first
• Specific Identification (SpecID) - the investor chooses which shares are to be sold, this determines the gains or losses for that particular share.
• First In, First Out (FIFO) -  the oldest shares are sold first
• Last In, First Out (LIFO) - the newest shares are sold first
• Loss Gain Utilization – shares are sold by those with losses first and then gains last

Each company will provide you with a way to choose a method for calculating the cost basis method. Typically, if you do not make a choice, the average cost method will be chosen for you. You are given additional options so you can tweak your tax strategy moving forward. It might be beneficial for you to hold onto the shares you first purchased many years ago at a lower price while selling your most recent shares that were acquired at a higher price because your capital gains would be lower.

For example if you have been investing in a mutual fund whose price was initially $10 per share and has now risen to $60 per share, you would want to sell your $55 shares first rather than your $10 shares. The difference in capital gains could be huge. However, managing your specific shares you are selling to maximize your tax benefit requires you to be very hands on with your investments.

Covered vs. Non-covered shares

The IRS is only changing the rules for a certain set of investments. For mutual funds, the covered shares (or the shares the changes will begin impacting) are those that are acquired on or after January 1, 2012. If you invested in a mutual fund earlier than that, your cost basis rules will not change on those shares.

Does the Change Only Impact Mutual Funds?

The new regulations are impacting cost basis reporting for all securities: individual equity positions (stocks), mutual fund shares, ETFs, fixed income products, and options. However, not all of the changes are impacting all of the investments at the same time. Stocks acquired anytime on or after January 1, 2011 will be considered covered securities. Mutual funds and ETFs are considered covered as of January 1, 2012, and options and fixed income securities are covered beginning January 1, 2013.

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