Tax Planning

For most households, taxes are the biggest expense. Paying taxes is inevitable, and it is a very bad idea to practice tax evasion. Even the gangster Al Capone couldn’t get away with it. Fortunately, tax planning and tax avoidance are perfectly legal. You should see a tax professional to find out every way you can save on taxes, but there are a few areas where just about everyone can find some relief.

For example, most municipalities that have property taxes (and there are not many that don’t) also tend to have some kind of homestead exemption. While a homestead exemption is a great way to keep down your property taxes, you can also lower them by having your home’s official value reassessed. Don’t worry about lowering the amount of money you may be able to sell your home for down the line, as the officially assessed value is not the same as the salable value that a real estate agent would declare that your home is worth.

In most cases, your assessed value does nothing more than determine your tax rate. So starting the often long process of having this value reduced is a good use of your time.

Harvest losses from your investments so that you can deduct up to $3,000 in net losses from your taxable regular income. This is a very, very neat trick that allows you to match investment losses to your regular earned income. For most people this is a great deal because their highest tax bracket is higher than long-term capital gains.

You may be able to deduct many expenses associated with your job. Whether you need a uniform, a good suit, a dedicated cell phone, or a pair of gloves, you should see if you can deduct everything that you can in order to reduce your income taxes.

Other tax areas where you can save may involve the payment of mortgage interest and the contributions that you may be making to a tax-advantaged account (you can’t deduct contributions to Roth accounts). You can even potentially set up a health savings account that can keep money both in case you need it for a medical emergency and so that you can reduce your taxable income by the amount of your annual contribution to the account. Naturally, setting up these kinds of accounts can save you a ton of money on your taxes.

Transportation Costs

Transportation costs can be a tricky subject to consider. On the one hand, your transportation costs are ultimately going to be determined by where you go. How you choose to get there ultimately comes down to three factors: how much money you can make with the time you can save, how important being able to get somewhere quickly and through independent means is to you emotionally, and how expensive it actually is to take one form of transportation versus another kind.

Cars are all but a necessity in some parts of the world, while in other parts they are merely convenient. Based on where you are and what kind of occupation you practice, if you have a car you may be able to reclaim time that you can use to make more money. If you would actually make this extra money by saving this extra time, a car may very well be a great investment. However, if you are not going to derive a net benefit from saving time it might just be a toy.

You can find a great car in a lot of different places, but you have to remember that a car has a lot of variables to it. You can go to the Consumer Reports website, which is a not-for-profit enterprise devoted to helping consumers make informed buying decisions, and from there you can find out if the make and model of the car you want is listed as good, neutral, or bad. In some cases, looking up a particular area such as fuel economy or safety features can tell you a lot about which cars you should be considering. In some cases, a car might seem to be really good at one area and be marketed for it but be a very bad fit for you because it either has features you don’t care about or lacks features that you consider to be vital. The Consumer Reports website is laid out to make finding reviews easy, and typically it costs little to nothing to use this research tool.

You have the right to spend your money on anything that makes you happy. If you do not want a car, you don’t have to get one. It’s as simple as having personal power over how you spend your money. While there are personal finance articles that would tell you to never buy a car because it’s a very expensive process, sometimes in life it’s okay to spend money when you have control over where it’s going.

In some cities, you might be able to get away with using a motorcycle with a sidecar as a means of transportation. Cars are at their most convenient when you are transporting a lot of things or when it is cold outside. Waiting at an Amtrak station or taking a motorcycle everywhere is a lot more viable in warmer climates than it is in colder ones. However, the cost of comfort may be very large, and you may have other priorities in life that make bundling up and enduring the cold a few months a year worthwhile to you.

How much are you going to be spending on gas if you do get a car? People love to complain about gas prices almost as much as they enjoy having a full tank, but ultimately you do have some control over your vehicle’s fuel economy. Much of this control happens when you read up on how many miles a car you are considering gets per gallon of gas you put in the tank.

Another part of this equation comes into play when you consider the speeds you often drive and whether a lot of your driving involves lots of stopping and starting. While buying the cheapest fuel you can find is useful, often you are only going to save $.50 to $3 per fill-up. Over a year of 70 fill-ups, that would likely only put an extra $200 or so in your wallet. The costs of owning a car tend to dwarf that, though every little savings may count. You can use sites such as and Gas Price Watch to locate the cheapest fuel in your area.

Beyond the cost of fuel, you also need to consider the incidental costs such as insurance, mandatory government inspections, mechanic costs, and license plates. While it might be tempting to drive without insurance, one liability claim caused by a patch of ice and a lawsuit-happy person you collide with can cause serious long-term damage to your finances without insurance.

Fortunately, the type of vehicle you choose can have a very large impact on the ultimate costs of your insurance.

This kind of car will need only about 455 gallons in a normal year and will set you back only $1,592.50.

So you’d end up saving about $600 a year. Since most people keep their cars for three to five years, you would end up saving yourself roughly $1,800 to $3,000 over the time you own your vehicle. However, if you pick a top-of-the-line hybrid that gets somewhere in the 40 mile per gallon range, you can go even further. The 250 gallons of gas for your annual commute will run you a gloriously penny-pinching $875, or a cost of $2,625 over a three-year period. If you can hold onto your hybrid for seven years, you will have saved yourself nearly $9,000 versus buying an SUV if gas prices stay in the same price range and all other costs are basically equal. Keep in mind that costs are almost never equal, so it gets more complicated than fuel economy.

The overall costs to operate any kind of vehicle can get very tricky when you consider the costs of plates, insurance, and maintenance.

Maintenance is the most important part because the other issues are merely about legal compliance. In an emergency such as rushing a critically injured family member to the ER, you could drive a car without insurance. But if the car won’t move, all the legal compliance in the world will not help you. At the highest end, top-of-the-line sports cars can literally cost hundreds of thousands of dollars a year to keep in shape from a sheer maintenance perspective. Most cars can get by on $500 worth of oil changes and tire rotations in a normal year, but keeping an extra $1,000 on hand in case the engine or some other part needs work can also be extremely helpful. It’s generally best to have money you don’t actually need so that when you do need it finding the money isn’t a big deal.

Insurance for a cheap car averages around $300 a year for basic coverage.

For a few hundred dollars more per year you can add a great deal of liability protection, which is a good idea if you believe a moment of bad judgment or bad weather might cause you to collide with someone in a way that could be considered your fault. For more expensive cars, the coverage will naturally go up. For a mid-range car, you might expect to pay somewhere in the $1,000-$1,500 range each year for your insurance. At the high end, you can expect to pay somewhere in the $3,500 per year range to provide your car with proper insurance.

License plates are somewhat variable but rarely expensive. Every state varies in how the cost of plates is calculated, so visitng your state’s department or bureau of motor vehicles will provide you with the most reliable answers.

If a car costs $20,000 with a 5% interest rate and you put down $2,000 and take out a 3-year loan (assuming a 7% sales tax), you will pay $581.44 each month or $6,977.28 a year for 3 years. If the loan’s duration is 5 years, you’ll be paying $366.10 per month or $4,393.20 per year over the 5-year term. The difference is about $1,000 in interest and $200 less each month. If you make steady payments over the course of the loan, you may be able to renegotiate for a lower interest rate and substantially lower this monthly payment and still reach your original pay-off date.

After everything, you can generally expect to pay somewhere in the $8,000-$10,000 range each year for a car you are making payments on or about $5,000-$7,000 a year for a car you own free and clear.

The main reason a car you own outright is not “dirt cheap” is that cars you own outright tend to be older and thus require more maintenance to keep running properly.

For a new car you purchase outright, you may be able to skate on $1,000 or less per year for the first few years. There are so many variables in place, however, that you could spend months thinking through them all to maximize your preferred aspect of car ownership. Do you want the absolute cheapest car you can get, do you want the absolute safest car, or do you want the car that will last the longest? Perhaps you want the car that will need as little maintenance as possible for the first few years you own it. There are no free cars.

Housing Costs

Your housing choices contain a lot of variables that you need to think carefully about. We will go over them briefly here.

First, you need to determine if it is cheaper to rent or buy. There are various online calculators that can help you calculate this, including one from the New York Times. It is not always cheaper one way or the other, so you have to calculate. If your calculations show that you would have to live in the home for many decades before it beats rent or if it shows that the cost of renting is much cheaper than buying (more than 30%) we recommend that you rent. If home ownership is clearly cheaper (more than 30%) than renting with reasonable assumptions, consider buying a home. If the costs are close to each other, it is a matter of personal preference.

The location of the home you rent or buy will dramatically impact your expenses. The farther away you live from work, the more you will pay in transportation expenses such as gas, car deterioration, and insurance.

Look for Value

Value is a strange term. It can be used to indicate that something is useful or it can be used to suggest that something is a good trade off for what you get. Price is what you pay, value is what you get. Though there are cases where great values all but jump out at you, there are other times when a low level of value is hidden behind hype and flashy packaging.

A great value is derived from receiving a significant benefit from something you buy. You don’t always get what you pay for, and you would be better off doing your research before you make any substantial purchase. This research needs to take into account the ultimate utility and enjoyability of what you will have after your purchase because marketing hype is inevitably going to fade long before the functional life of the object you purchase ends. While obsolescence is planned in this day and age, you may still be stuck with a fad item for years if you buy based solely on hype.

Sound judgment starts with how useful the object is actually going to be. Do you already own this item in your garage somewhere? Will you actually use it, or will you stick it on a shelf to collect dust? If you are only going to use it once, could you borrow it from a friend?

Buy Used

Buying used goods can be a great way to save a ton of money on just about everything. When you buy used, you save a great deal of money simply because much of what people pay for with any kind of new item is the newness itself. The fact of the matter is that most of the newness of an item wears off within a matter of hours. Simply watch small children as they receive the holiday gifts that they have been hoping for over several months, and you will see a distinct and rapid decline in interest that never really stops as people age. It simply becomes more subtle.

Fortunately, buying used items can yield tremendous savings if you are careful about what you buy. You still need to look for good quality, and often you need to check out the item that you intend to buy before you do so to make sure that it is in good condition. Aside from toiletries and certain personal items, nearly anything can successfully be purchased used.

For example, you may be able to save tens of thousands of dollars off the price of a new home by purchasing one that someone else has owned before. In some cases, a home owner has simply decided that they would rather not own. In other cases, the person decides that they do not want to live in that area anymore. In still other cases, you can benefit from someone who has bought a house and rehabbed it and provide them with a profit while you still save versus buying new. While a home is the largest example of how buying used can save you money, there are also a lot of other items that will allow you to save a great deal.

When you buy a computer that someone else has previously used, you can often find a tremendous deal if it is even six months to a year old.

In the case of software, a two-year-old game you have never played will still be as fun, and it will have more detailed strategy guides and walkthroughs to it. If you buy a car, remember that most of the value is lost during the critical first few months to a year of ownership. For many people, pride of ownership begins to rapidly diminish after a month or so. You can save a bundle on a car by taking advantage of this fact.

In some cases a used car can save you a lot of money. Some older cars are still very reliable and keep up good gas mileage in spite of having hundreds of thousands of miles on them. You can also generally save thousands or even tens of thousands of dollars buying used because of the mystique that surrounds a new car.

As a general rule, you can find used cars on websites such as eBay, Amazon, and Craigslist to negotiate direct car deals with other people. But be warned that once your money leaves your hand it will never come back if the car turns out to be a lemon. A good way to make sure you are getting a reasonable deal is to find a mechanic you trust and to ask the seller to meet you with the car at the mechanic’s shop to get the real information. Most legitimate sellers who have nothing to hide will be okay with this because it will vindicate a real deal and provide them a solid platform to state that the car really does run well and needs only what they say it does.

However, there are organizations that can facillitate buying used cars.

Organizations such as Goodwill, the Salvation Army, and the Society of St. Vincent de Paul all accept donated cars and will even bring them to working condition.

Buy the Best Car Models

Your ultimate cost of ownership can be greatly reduced through the purchase of a used car. While buying a used car is often considered to be one of the best financial decisions that you can make, there is a smart way to do this and a reckless way to do this. The smart way involves using critical thinking skills and doing research.

Higher prices are not always connected to greater value. Often, there are consumer reporting websites and forums such as ConsumerReports.org where you can find all kinds of information about the value of different car models. As a general rule, these websites do not have the biases that you would find on a sales website. But they may also require a significant amount of research to find the sheer volume of information that you will need to make an informed decision.

When you go to a website such as Carfax and check out different cars by their VIN or vehicle identification number, you can see just about everything in the car’s history and compare it against the claims that the seller is making. If everything checks out, you may have a good car on your hands. If the car is also priced well, you may have a great buy all but sitting in your lap.

Keep in mind that having a used car will tend to require more maintenance and it may spend more time in the shop than a newer car might. If you buy a two-year-old used car, it should generally be okay. But buying a ten-year-old car will tend to bring along some additional baggage in the maintenance department. When you determine whether to get a brand new, slightly used, or heavily used car, you are going to need to decide how much your peace of mind is worth to you financially.

Why Buying a Used Car Makes Sense

Buying a used car often makes sense, but not always. The dogma of “always buy used” has a few flaws to it, but it generally works out well for a few reasons. For one thing, a used car has a higher likelihood of allowing you to pay cash for it and save yourself a few hundred or even a few thousand in interest costs. For another, a used car has gone through the shakedown period where a new owner finds any flaws the car may have had, so you are likely to get a car that simply works.

Perhaps the final reason why you are likely to get a good deal on a used car is because new cars are all about romance. The smell of the car is purposefully designed to give the “Christmas morning” effect of combining plastic and vinyl (which are also smells that come in a lot of new toys, thus creating a psychological association between the two).

A car is estimated to lose 29% of its value the moment you drive it off the lot, and the value decline during that first year is often in the 50% range. Often a used car also costs half to one third of the price of a new car just to insure.

For example, take the Acura RL with the basic package. It gets around 20 miles per gallon and is a four- door sedan with a good safety rating that is reasonably easy to find. For a new version you can expect to pay in the $44,000 range before any incentives or trade-in price alterations. However, for a two-year-old model that is in good condition (according to Kelley Blue Book that applies to 23% of the used cars on the market of that make and model), you can skip out on a lot of that and only pay about $31,000. In essence, you can get the same car for a solid 25% off its price just by buying a slightly older model with practically identical statistics and operation but an average of 35,000 miles on it.

How to Buy a Used Car

First, you need to know the condition of the car itself. Is there anything that would indicate that it has been in an accident? Has it had a fire? Has it been submerged in water, particularly salt water? The car’s title should give you some information, and an inspection of the car may also tell you a lot. But in a lot of cases the disclosure regulations on reputable websites will let you know if there is anything significantly wrong. From here, you can make a decision about whether the car is worth buying or not.

You may very well have the skills to fix up a car that needs work. While some people would shrink from the possibility of having a car that needs to have any work done to it, being able to fix up your potential ride can be a serious boon when you buy used.

If there is a part that most people would not even want to try and replace but you know that it only involves removing a few panels and getting your hands dirty to install a $5 part, you may be able to parlay this knowledge and willingness to put in some sweat equity into a significant savings versus a car that doesn’t need any work done to it.

Secondly, you need to know the stats on the car. Is the title clear of any liens? How many miles are on the car? Does the title match up to the car itself? If there is anything that isn’t right about the title, it might be the result of fraud. At the very least, it can lead to being pulled over if a police officer checks your license plate and sees that it should belong to a completely different make, model, or substantially different color of vehicle than yours. In some cases, this is merely an administrative error, but it can be a pain to fix. This can also be a discount if you play it correctly.

Another very important facet of buying a used car is where the car is actually located. If you are going to buy a car, you need to get to it and get it back to you. If the car is 15 years old and has 400,000 miles on it, taking a bus to the other side of the country to pick it up might lead to a very comical road trip story in which it breaks down hundreds of miles before you get home. Where you draw the line about how far to go and what level of mileage and age you will tolerate in a car is a very personal decision that you would be wise to consider carefully before you commit yourself to anything.

While there is a lot to know about used cars, they still tend to be a good deal if they have been properly cared for. Today’s vehicles can generally last 200,000 miles or more if the owner cares enough to perform general maintenance on them.

Exploit Bank Promotions

Banks know that most people join a bank and stick with it, so they gradually introduce more fees and additional requirements in an attempt to drain your money. They also often offer promotions to attract new customers. It pays to be disloyal as a banking client if you are willing and able to stay on top of the details of the accounts you open and close.

Many banks offer bonuses for setting up an account. If a bank that your research indicates is good offers an incentive it would be wise to take it. In the same vein, you should at least consider taking on a credit card if it allows you to hold it with no fees and a monetary gift.

You should shop for the highest possible FDIC-insured bank interest rates for your checking and savings accounts. Look for a company that is typically in the top three or four of interest rates, then check out their promotional offers for fees. If there are monthly fees that you need to jump through a lot of hoops to escape from, you should at least consider taking your money elsewhere.

Food and Restaurants

While you might consider food to be important enough that you can spend lavishly on it, there are ways that you can indulge yourself and still save money. In most cases, you will barely notice the differences between using your food money in one way versus another.

Do you know why coffee shops such as Starbucks make so much money from people’s coffee habits? It isn’t because the coffee that you get at a coffee shop is intrinsically superior to what you could make at home using beans you can buy at any grocery store for a fraction of the cost. For the most part, the main draw of having your caffeine fix at a coffee shop is that there is an element of higher social status in such a venue.

If you want to enjoy the experience of being in a coffee shop, all you have to do is brew your own coffee. You can drink it in a nice common area such as a mall or a hotel lobby. While you might feel bad about sitting there, you aren’t hurting anyone. You can order something from a local business if you feel like the place will suffer if you don’t, but you should never feel obligated to buy something just by being there. Are you required to buy a car when you visit a car lot, or are you pressured to make a purchase in every section of a big box retailer you may visit to do your shopping in a particular section? Of course not.

Take a hypothetical example with a man named Jim. He decided to save the $3 a day he was spending on his favorite coffee at the local coffee shop and brew his own. By brewing his own coffee, Jim was able to save approximately $2 each day. That’s $10 every week for a few minutes of easy work every morning.

Over a year’s time, Jim was able to put away $520 that he didn’t even miss because of brewing coffee for himself.

In the realm of food, you can save a bundle when you go out to eat by simply getting an appetizer instead of a main entree. In some instances, ordering two appetizers will fill you up just as much and still end up saving you money. You can even save by going out to lunch instead of dinner, which is traditionally a less expensive way to go about the process of eating out. When you think outside the box, and even better if you can integrate coupons into the experience, you can save and indulge yourself.

Of course, there are lots of other ways you can save a bundle of money on eating out. For one thing, eating breakfast out can be a great way to save versus going out to dinner, and it can even be cheaper than eating out for lunch.

Lifestyle Costs

Your lifestyle might be the most expensive aspect of your financial picture. While there are tons of ways you can cut costs, some of the most heavily rational are also coincidentally some of the hardest to give up doing. While people who have an addiction find it difficult to give up on the lifestyle choices that tend to cause and promote obesity, the costs of being obese are extreme all over. As well, the costs of smoking also tend to be unbelievable both in an immediate sense and over the long term.

The detriments of smoking go beyond spending as much for cigarettes in an average day as one might on food. Yes, foregoing the cost of a two-pack-per-day habit would save enough money to make the maximum $5,000 or $6,000 Roth IRA contribution each year. However, the health dangers that are associated with smoking are much more expensive.

For any kind of cancer, the chemotherapy and radiation treatments that most people end up needing can run into the thousands of dollars. Surgery to remove many kinds of cancers can become a single event that costs you tens of thousands of dollars. If you think that your insurance will pay it all, think again. You will still have to provide co-pays or deductibles, and your insurance premiums will be higher because you smoke.

In the same vein, obesity is a huge additional expense. A lifestyle of little exercise and overeating can be expensive. Extra food is often more expensive than less food. You can also save money on gas by walking or biking as part of your transportation. Consider the additional portion sizes that tend to lead to obesity in a person. The larger your portion sizes are, the more likely you are to become obese. As well, the additional costs of medicine for type 2 diabetes are substantial.

Health Care Costs

Medical expenses are one of the largest expenses you hope you never have to pay. While most people will furrow their brow a bit when their insurance bill arrives, the wise people pay it because they know that not doing so is a horrible idea. Your health care costs generally consist of two major components: the prices you pay that involve your insurance plan and how you use any potentially tax-advantaged health care savings plans that you might have access to. Using both of these options can help you tremendously.

As a general rule, a health savings account or HSA is one of the best things to happen to the health care world for many people since the invention of the x-ray machine. When you have a small amount of each paycheck deposited into an HSA, you give yourself the option of paying for your health care in a more constructive way than you otherwise might if you were saving manually.

You also allow yourself to defer paying taxes on those earnings because of the tax-advantaged nature of an HSA. But while having an HSA is good, making sure you have the best possible insurance is even better.

With proper insurance, you can avoid having to pay massive costs out of your own pocket. While you may still have to cover many of your health care costs, if you have good insurance your costs will be comparatively minimal. In the cases of serious illnesses and injuries, you can often find yourself spending a tiny fraction of what you would if you were paying cash for all of your health care costs. This is why shopping around for your insurance is a vital component of your making your health care dollars work hard for you.

When you shop around for your health insurance, you can select from the most important points. As a general rule, these are your out-of-pocket amounts, what your premiums will be, where you can use your insurance, and what your insurance will actually cover. Your premium amounts can be reduced by tightening your network of health care providers and raising your out-of-pocket costs with a larger deductible amount. In some cases, such as if you have a pre-existing condition, you may be able to use a process called ridering to make your insurance less expensive by not having certain conditions be covered.

Jim’s Coffee Money

Jim decided to save the $3 a day he was spending on his favorite coffee at the local coffee shop and brew his own. Brewing his own coffee, Jim was able to save approximately $2 each day. That’s $10 every week for a few minutes of easy work every morning. Over a year’s time, Jim was able to put away $520 that he didn’t even miss because of brewing coffee for himself.