Paying Off Your Credit Card Balance vs. Paying Your Taxes

I had a reader ask an interesting question the other day. If I am short on cash, should I pay off my credit card balance or pay my taxes?

Obviously if you don’t pay your taxes or credit card bill at all there are legal issues involved but this person is trying to decide which to put off and which to pay first. The options they’re considering are:

• Making the minimum payment on their credit card and paying their taxes in full.
• Paying off their credit card bill and paying their taxes late.

Since I’m not very familiar with the implications of paying your taxes late or what options you have to work with the IRS on making payments I thought I’d open this one up to the readers.

The goal is to minimize the amount of interest and penalties you pay to both the credit card company and the IRS. Assume you have a similar amount due to both the credit card company and the tax man. Which option would you choose and why?

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Personal Finance Books That Made A Difference For Me

The Frugal Law Student recently asked if I would share which personal finance books had inspired me.  I don’t know if inspired is the word I’d choose but The Millionaire Next Door and Smart Couples Finish Rich were the first to come to mind for the reasons I describe below:

The Millionaire Next Door
I think the first personal finance book I read that really got me excited about the power of frugal habits combined with long term savings was the Millionaire Next Door. I like to think our family follows the basics of living frugally and saving/investing money as described in the book.

Smart Couples Finish Rich: 9 Steps to Creating a Rich Future for You & Your Partner
I also enjoyed Smart Couples Finish Rich; not so much because of its unique content but because it’s a personal finance book I could get my wife to read. Obviously having both partners in a marriage on the same page is necessary for successful financial planning and execution. 

One last comment on personal finance books; it’s not enough to just read them, you have to put the practices you learn about into place to make a difference. It’s easy to get pumped up about saving or making money after reading one of these books, it’s another to get out there and make it happen.

I’d say you’re much better off just reading one or two books about money and then taking the time to make changes in your life; rather than spending time staying up on the latest personal finance best seller. Once you’ve implemented what you learned, then move onto another book.

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Retailer’s Anger Reveals How You Can Make Money on eBay

What would you do with 25 of the exact same purse? A recent USA Today story tells of a woman named Triss Budoff who bought that many purses at Target for about $1000 and has already made $750 profit by selling 10 of them on eBay.  Now that’s a nice take and she still has 15 of them left!

Making Retailers Angry
One problem Budoff and other part-time entrepreneurs like her face is that retailers are starting to crack down on this product arbitrage.  According to the article sales of clothing and accessories has seen a 73% growth on eBay over the past two years with handbags and jewelry being the most damaging to stores.  High price retailers such as Coach (overpriced purses) and Gymboree (overpriced baby clothes) are looking for ways to stop people from selling their goods online because of what they claim to be potential damage to their brand.

The Coach spokesperson complained that “Unauthorized distributors lack the proper commitment to the Coach product” while Gymboree’s director of public relations and advertising argues, “We need to protect our image. We can’t ensure a product’s quality on eBay, and we don’t want people to think we’re selling things on eBay.”

Retailers Fight Back
One step some companies are taking is to limit the quantity a customer can buy of one particular item.  Purchasing 25 of the same thing is usually a red flag someone plans on reselling the product.  Coach is even contacting eBay sellers and threatening to ban them from Coach stores if they keep selling on eBay.

Scrolling through the 58 comments that readers left on the story, it doesn’t sound like many people have much sympathy for the companies, whom they assume are making huge profits on the enormous price markups in their stores. 

You Can Make Money Too!
Although this article is about a “crackdown” by retailers, I see it as a sign of opportunity for individuals.  I engage in similar practices myself with different products and agree that it can be quite lucrative.  I’m not going to stop doing it simply because a few big companies are unhappy. 

Of course there are simple ways around product limits by retailers. Just checkout several times, going through a different line each time.  Or you could bring a friend or family member along and have them buy some as well.  You may get some strange looks when you roll up with 10 of the same thing in your cart but with profits like Budoff is making, who cares!

Of course if you’ve never sold on eBay before I wouldn’t just go out and buy 25 purses for a good price.  If you’re unfamiliar with the product and how it sells you could get stuck with them all or have to sell them for a loss.  I’d start with one or two and once you get the hang of it then swing for the fences!

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Money Mistakes to Avoid – Procrastination

Why do today what you can put off until tomorrow? If that is your motto then this post is for you!

Time is Money
Even if you’re not a procrastinator by nature, you’ve probably had a time or two where putting something off cost you money.  Whether it’s paying money you shouldn’t be because you forgot to cancel a subscription or missing out on compound growth because you haven’t setup a savings or investment plan, procrastination can be expensive!

In our busy lives, time goes by faster than you can blink. Each birthday and tax season seems to come sooner than the last one.  Those months and years add up when you’re talking about paying higher expenses or earning lower returns on your money.

Make a Decision
The reason we procrastinate is often because we don’t know how to take the next step or don’t know what to do.  We decide we need more information or want to “think about it” for a little while.  Before we know it, a little while turns into a long while and we still haven’t made a decision.

A great example of this is not signing up for a 401k plan because you’re not sure which funds to choose.  Smart Money magazine reported that procrastination is one reason almost half of employees don’t participate in their 401k plan or contribute enough to get the company match.  I’ve seen this in action myself. 

Our 401k administrator offered a seminar on our plan and its options several years ago.  I was already investing and knew the plan options but attended to see if I could learn anything new.  Not much came out of the meeting other than the revelation one of my co-workers hadn’t been putting any money into his 401k ever since he started working there because he didn’t know which funds to invest with!

Live & Learn
We got my co-worker putting at least enough to earn the company match into some index funds.  I pointed him towards a few personal finance websites and recommended a few good books on money to help him get more comfortable with his investing decisions.  Later on we talked about how he was glad he finally got started even though he didn’t know what he was doing.  A lot of times just taking some action is what it takes to get over the indecision that leads to procrastination.  You might not make the best decision possible but you learn from your choices and make changes accordingly.

Make Time for Your Money
If you have some financial decisions or actions you’ve been putting off now is the time to take care of them.  I find what works for me is to make a prioritized list of the things I need to do and carry it around with me until I’ve completed it.  You probably won’t have time to get them all done at once but if you write them down and stay on top of it you should finish sooner rather than later.

Money Mistakes to Avoid
Read about other money mistakes to avoid:

• Misunderstanding Risk
• Loss Aversion
• Not Seeing the Big Picture

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Personal Finance Review – Expensive Baby Shoes Edition

The weather is blistering hot here in the Midwest, making it too hot for our daily walk with our son.  We really wanted to get out so we headed over to a nearby mall to stroll around in the comfort of air-conditioning yesterday. I am not a big mall person, probably because I don’t enjoy spending money, but I will stop in every now and then. Luckily we left empty-handed but I was astounded by a stop we made at the Stride Rite store.

Whenever I need new shoes I am usually able to pick up an older model of Nike or Adidas they are phasing out for around $30 – $35. I was blown away when I looked at the price tag on some of the baby shoes and saw them priced as high as $50! I just can’t believe anyone would pay that much money for baby shoes but people must otherwise they would not price them so high. I could never pay more for kids shoes that I spend on shoes that are four times as big for adults. Baby clothes are a racket!

Here are some money posts I enjoyed this week:

– Deciding To Sell Or Keep Your Employee Stock Options @ The Digerati Life

– Investing On a Shoestring with DRIPS @ Lazy Man & Money

– Tired of Investing in the Same Countries All the Time? @ Suns Financial Diary

– I Am Happy When The Market Goes Down @ Money, Matter, & More

– Think the Stock Market is Going Down? Put Your Money Where Your Mouth Is and Profit From It @ Generation X Finance

– We Liquidated Our Target Retirement 2050 Fund @ Blueprint For Financial Prosperity

– Capital One Sucks Slightly Less Now @ Five Cent Nickel

– Everything Warren Buffett @ Free Money Finance

– Another good reason to pay cash for a car @ Mighty Bargain Hunter

– 401(k) Money Isn’t His Only Option @ All Financial Matters

– Opportunity Costs or How Not Watching TV will Help You Make Money @ DoshDosh

– Six Habits I’ve Given Up In Order To Save Money - And How Much It’s Saved Me This Year @ The Simple Dollar

– The Real Price of Cheap Books @ Money & Such

Thanks to The Frugal Law Student for including our submission on easy money in last weeks Carnival of Personal Finance.

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Organize Your Financial Records for Free

T. Rowe Price is offering a free Family Records Organizer CD on their website.  It is definitely motivated by a marketing effort to begin a conversation with you but it is free and I’m interested to check it out.  I have software to track finances but nothing to manage financial records on the computer. Here is how the software is described on the T. Rowe Price website:

* Offers a single place for you to capture important personal information about your investments, banking and credit cards, insurance, and more with the intent of passing this information along to your beneficiaries or keeping it in a safe place.

* Features a comprehensive Learning Center containing helpful videos and topic information on each of the CD’s recordkeeping categories.

* Captures the wide variety of information that is key to you and your family’s financial well-being and organizes it so that anything you may need is available at a moment’s notice.

* Allows you to be paperless if you choose. You can save your information electronically or print it out.

Ordering the Records Organizer

The software is not something you can download, it comes on a CD so they ask for a shipping address. When I requested mine, the confirmation page didn’t give a delivery timeframe, just that it would be mailed first class. I’ll let you know if it’s of any use once it arrives. Thanks to Beacon Financial Tips for bringing this to my attention.

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Show Them You Care With a Spousal IRA Contribution

Let’s be honest.  Sometimes a “non-working” spouse actually works harder with their duties at home than the working half does on the job.  What’s the best way to show them your appreciation, how about by contributing to a spousal IRA!

Keeping Up IRA Contributions
Okay, this move probably won’t win you the spouse of the week award from your significant other but they’ll thank you for it later in life.  I wrote the other day how I had cancelled my wife’s Roth IRA automatic contributions because she’ll be staying at home with our son.  I mentioned this to a money buddy at work yesterday and he set me straight, “Go home and read about Spousal IRA’s”!

Who Is Eligible for a Spousal IRA?
Typically a person must have an income to qualify for IRA contributions; however, the IRS guidelines allow an employed spouse to make contributions for their non-working husband or wife.  An article from Investopedia lays out the requirements you must meet to use a spousal IRA:

• You must be married.
• You must file a joint income-tax return.
• You must have compensation or earned income of at least the amount you contribute to your IRAs.

There are no income limits on who can contribute to a traditional IRA but an article from Smart Money explains the earnings cap for a Roth IRA,  the deductibility rules for a traditional IRA, and how any employer-sponsored retirement plan investments play into contributions limits.

Re-arranging Retirement Accounts
After our retirement investing changes, I was maxing out my Roth IRA then contributing the rest of our “retirement budget” to my 401k; more than enough to get the match of course.  After learning about the spousal IRA, I plan on maxing out both of our IRAs and putting less into my 401k; still enough for the match though.

Why Use a Spousal IRA?
Although this change will increase our Adjusted Gross Income it seems to be a good trade off since the Roth will give us more flexibility than the 401k in the pre-retirement future.  This is because the tax code allows you to withdraw non-rollover Roth IRA contributions (not the earnings) at any time without paying tax or penalty. 

We have a big enough head start on the 401k, I’d rather put our money into a Roth in case we need it 20 years down the road.  Since our income is dropping sharply due to the loss of my wife’s paycheck, the reduction in tax savings from putting less pre-tax into the 401k won’t put us in danger of crossing over into a higher tax bracket.

Showing Them You Care!
My wife doesn’t care much for talk of IRA’s, 401ks, or AGI so it’s my job to make sure these things are covered.  Sure it’s not the same as a dozen roses or diamond earrings but I’m pretty sure that 30 years from now she’d much rather have a big fat IRA than dead roses or overpriced jewelry.  A spousal IRA is a good way to help make sure your spouse at home will be “paid” someday for all the work they’re doing at home today.

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Forgot to Pay Taxes on eBay Income?

Minimize Your eBay Taxes & Maximize Your eBay Profits with eBiz Tax Tips

What should you do if you “forgot” to pay taxes on your eBay income?  I asked this question of a tax friend recently and got a multi-part answer that will likely interest you.

The Politically Correct Answer
The first part of the answer was to be expected. According to the tax code you should file an amended return with form 1040X and report the additional income you omitted.  I did a little bit of research on how this works when I recently ran across an electronic copy of a 1099–INT from ING Direct I thought I had forgotten to report.  Luckily it turned out the interest had been reported but this is what I found in my search.

An article by Kay Bell on Bankrate suggests you should file a 1040X if you mis-reported any of the following:

    * Your filing status
    * Your total income
    * Your dependents
    * Your deductions or credits

It’s likely the IRS will eventually notice your error and want their money if the problem is in their favor. However, if you catch the mistake first and report it they may waive some penalties. Why will they eventually notice? Because the money was probably reported to the IRS by the company associated with the income.

In this case you’ll have to work with your tax preparer or through your tax software to file the 1040X.  If you used TurboTax it will help you with the form.

The Other Answer
Now for the second part of the answer.  If you report income on form 1040X for previous tax periods, you are liable for interest and penalties from the date it should have been reported.  The IRS may waive the penalties but they have no obligation to do so.  In addition, your state will be notified of the income as well and can also collect interest and penalties.

In my example above, ING Direct sent in a 1099–INT to the IRS informing them of my income.  Although it will likely change in the future, eBay has not yet sent any income information to the IRS on its sellers.  This means the IRS is not aware you missed reporting income. 

My tax friend pointed out that you can still pay the original taxes you owe and avoid the penalties by reporting the income on the next year’s tax return.  Of course, the tax code requires you to report the income in the period in which you earned it and if you ever get audited you’ll owe even more interest and penalties than you would have because more time will have passed.  I’m not a tax expert so ask your accountant about the potential implications of this approach. 

Think Before You Act
I’m not recommending you wait to report missed income, just passing along what I found in my research. Personally, I paid taxes on my eBay income from last year and paid estimated taxes for this year so I should be all set. 

Some people feel if you catch an honest mistake and report it you shouldn’t be penalized.  They might ask what’s worse, someone paying the taxes late vs. not paying at all because they don’t want to get hit with penalties. Of course, the IRS doesn’t care if the mistake was honest or not, they just want their money and will take as much of it as the law says they can. 

Take Control of Your eBay Taxes
The simplest solution is obviously to not miss anything on your tax return. The best way to do that is to keep good records and not put off doing taxes until the last minute.  A great tax resource for eBay sellers that’s really helped me stay on top of my taxes is a book by small business expert Tim Knox and tax expert Kristine McKinley called eBiz Tax Tips.

Knox and McKinley help make sense of the tax requirements for your eBay business and show you many ways to reduce your tax burden. The tag line of the book is how to minimize your taxes & maximize your income and I think the book really does deliver on that promise. If you’ve been slacking on your eBay taxes, wonder if you’ve been doing it right, or are looking for ways to reduce the amount you pay I would definitely check out eBiz Tax Tips to help get your eBay taxes under control.

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Thank You Readers!

I really appreciate you taking time out of your busy, information packed day to stay current on the latest money adventures at Money Smart Life.  There are some days when writing about personal finance is easy and others where it is more of a struggle.  Of course this means some posts are better and some are worse, thanks for commenting on the good ones and sticking around despite the bad ones.

To the Future!
I appreciate all the emails I get and the comments you leave.  I hope my insights into personal finance are valuable and that you’ve been able to apply a thing or two you picked up here.  The truth about successful personal finance is it’s typically made up of many money decisions over time, just like a useful blog is composed of many articles and their feedback over time.  I’d like to think that your personal finance knowledge and net worth will grow along with this site.  Here’s to the future!

Getting to Know You
I know some of you quite well and some not at all. You probably know more about me than I you, which is fine because that’s the way blogs work.  I often wonder about the different people that read the site and what kind of things would be useful for you to read about. Feel free to shoot me an email through my contact form or leave a comment below mentioning more about you or what you’d like to see on the site.

Reader Giveaway, Kind Of
I’d like to give away something to all the readers to say thanks but of course our son keeps using up those diapers so a giveaway isn’t in the budget.  I can give away someone else’s money though. 

ING Referrals
As a customer of ING Direct they have a referral program that gives $25 to anyone I refer (plus $10 to me) that signs up for a  Orange Savings Account or an Electric Orange checking account. You have to be a new customer and make a minimum deposit of $250 to qualify. We use the Orange Savings for our emergency fund and I can recommend them.

If you’re interested shoot an email to readers@moneysmartlife.com and I’ll send you a referral, I have 50 available.  If not, stay tuned because I’ll definitely give away sweet prizes when our net worth hits the 1 million mark.  It will be a few decades but what better reason to keep reading :)

Thanks again for reading and helping make this site a success!

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How About Credit Card Savings Plans for Small Web Businesses?

What about the little guys on the web?  Why can’t we get savings on services we actually use? 

Credit Card Savings Plans
I’ve mentioned before I’m using my business credit card to build a credit history even though it doesn’t offer cash back rewards. I was hopeful when I heard my bank was offering the MasterCard BusinessCard with a rewards program but was disappointed to discover the plan was only the MasterCard Easy Savings, saving 10 – 20% at select merchants, not the cash back rewards I was looking for.

I checked out the participating companies and was frustrated to see I didn’t do business with any of them.  The merchants fell into the following categories:

• Airlines
• Hotels
• Car Rentals
• Business Services
• Print & Shipping

No Savings for Me
One of the nice things about a home web-based business is that you don’t have to fly all over the country to meet clients, work with partners, and make deals. That knocks out any business credit card savings from airlines, hotels, car rentals.

The business services consist of things like staffing, payroll, and human resource software, again things my one-person Web business does not need.  I do quite a bit of shipping for my eBay business but it is all through UPS or the Postal Service, not the express shipping vendor the savings program uses.

Web Businesses Savings Plan
I propose a financial institution come up with a credit card savings plan for small Web businesses that includes services we actually use.  They could offer discounts with domain registration and Web hosting companies or I would love to save even a few percent on payment processing. How about partnering with a company like Elance so we could get rebates on a wide variety of services such as web design, application development, copywriting, search engine optimization, and more?

I suppose if there was money to be made banks would have already pursued something along these lines and I am sure there are logistical issues.  However, as the number of netrepreneurs continues to grow maybe there would be a market for small web business credit card savings plans.  Not to be greedy but of course I’d want it to be a cash back card as well.

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