It’s December 18th, I have $131.81 in my Flexible Spending Account (FSA) and I have absolutely no idea what I’m going to spend it on. This is doubly difficult because last year I smashed a year of spending in three months (only $300) as I overfunded my FSA when I started my new job and I spent down my former job’s FSA, all in about the same two or three month period. So, what can I do? I took a look at the list of eligible FSA expenses and broke them down into a bunch of categories: Procedures, Nice To Have Items, Stock-up-able Items, and Useless (And Perhaps Funny). (I pulled the list from some page I found)

Procedures

First and foremost, consider getting a general medical check-up or eye exam or dental check-up. All the out of pocket expenses related to these are covered and if you haven’t done it this year there’s certainly no reason not to. So, when you get a dental cleaning and you pay a few bucks for the co-pay, that’s covered. This should be idea #1 when spending down your FSA (as long as you haven’t procrastinated like me, but I’ve gotten all checked up earlier this year).

Nice To Have Items

These are expensive items that don’t have a daily purpose but might be nice to have around the house such as a blood pressure monitor, ear infection monitor, and other personal test kits. Some items that aren’t explicitly listed under an OTC item are heating pads and ACE bandages, but I’ve claimed them before and they had been reimbursed.

This category of items I’d look into last after stocking up on stock-up-able items.

Stock-up-able Items

This category is exactly what it sounds like, all those OTC drugs you can stock up and use for the next year. These are your pain killers, allergy medicines (antihistamines), decongestants, anti-arthritics, antacids/acid-reducers, band-aids and bandages, contact lens solutions (I stock up on this stuff, I probably have around 20 bottles!), denture adhesive, ear and eye car products, eye drops, hearing aid batteries, lactaid/lactose intolerance, hemorrhoidal products, motion sickness pills, throat pain medications, condoms (whoo hooo party!) and wart removal.

This list can go on and on with tons of products you use and is always my first bucket. The warning I have is that you shouldn’t ever buy more than a year’s worth of any one product because you’re likely going to go through the exercise against at the end of next year. It was a mistake for me to stock up on 20 bottles of contact lens solutions before I thought about it because now I have enough solution for far too long (don’t worry, I checked the expiration date and I’m safe).

Useless (And Perhaps Funny) Items

Now, these are useless to me but they may not be useless for you. What fits into this bucket will depend on your situation but all the products that need a doctor’s note or handle a situation such as obesity or smoking addiction don’t apply to me. The ones that require a doctor’s note cover very specific conditions such as joint pain, dental flouride, OTC hormone therapy, snoring cessation, and other such conditions. The ones that don’t require a note but must be “medically necessary” are weight loss pills and smoking cessation products (patches, gum, etc.)

So, check out the stock-up-ables and stock up, then consider something “extravagant” like some blood pressure monitor or a an ear infection monitor; when thinking about how to spend down your FSA. I’m going to stock up on loratadine, the good stuff inside Claritin’s allergy medicine, some OTC drugs, and perhaps something extravagant to finish off that list little bit of cash. If you’re looking for ideas, drugstore.com has an FSA store that I sometimes search through when trying to figure out ideas.

It’s Week 16 for the National Football League and after nearly an entire season, I’ve finally collected enough ammunition to put together a post that ties together personal finance and America’s real pastime - tackle football (baseball? what? steroids?). So, after the week in which the Miami Dolphins won their first game over the hapless hometown Baltimore Ravens, losers of eight straight, and a week after my Jets gave the undefeated Patriots a pretty good run for their money - what can football teach us about personal finance? Let’s begin with the basics.

Lesson 1: Offense, Defense, Special Teams

Coaches often talk about winning the three phases of the game: offense, defense, and special teams. Sometimes it’s okay to win only two, but if you want to dominate then you’ll have to win all three phases of the game. Surprisingly, personal finance has three phases as well: income, spending, and investing. Income can be seen as your offense, since you go out and earn that money. Spending is really defense, you need to defend against unnecessary spending, fight off those emergency spending situations, and protect your loot. Finally, investing is where I see special teams. Special teams plays infrequently, about as frequently in a game as you want to be touching your investments. However, once and a while, especially if you have Devin Hester of the Bears on your team, an investment can bring in a big play that can change your financial picture.

Lesson 2: Clock Management Is Crucial

Some coaches are great at clock management, some coaches are terrible. I’ve never seen a team win a championship when led by a coach known for terrible clock management. Why? It’s because in the closing seconds of halves and games, being able to control the clock with smart play calling and timeouts can mean the difference between winning and losing. How does this apply to personal finance? The game is your life, the clock is your age, and your decisions depend on both. The easiest example has to do with retirement planning. If you’re young, go aggressive in your investments and save as much as you can. If you’re older, become more conservative with your investments and protect the principal you’ve built up over the years. If you’re in retirement, you want capital preservation and income generation, taking a bond that yields less may be prudent here and to go aggressive would be a mistake. (Photo by bkgrl_16)

Lesson 3: Defense Wins Championships

Defense = spending and controlled spending will win you championships. That’s right, how much you earn and how well you invest are important, but runaway spending will down you each and every time. Think of all the lottery winners who are now bankrupt and living worse off than they were before the big win, there are a lot of them. Why? Spending. Controlling your spending is much easier, more impactful, and more reliable than increasing your income or improving your investment decisions.

Lesson 4: Understand The Conditions

Teams know that when it rains, footing will be sloppy, passes will be difficult, and overall the game speed will slow down. Teams also know that on field turf the game plays much faster, that indoor stadiums are more conducive to passing, and some open-air stadiums are difficult to kick field goals in. Understanding the conditions under which you’re operating in is crucial for optimizing your performance, this is again true for anything in personal finance. If you were to invest in real estate right now, I’d recommend you tread carefully because it’s in a delicate time for that industry. If you were to invest in gold, it’s important to know that it’s at record highs because of the instability of the dollar. It’s important to understand the environmental conditions before you make a decision to do anything, to act without that information would be foolish. (Photo by NicelySighted)

Lesson 5: Rely On Experts

Head coaches always have assistants, coordinators, and other people on their staff to support them. Why? No one human being can possibly do everything. No one human being can possibly know everything. To be so arrogant is foolish and would only bring down the effectiveness of the team, that’s why many teams have such large coaching staffs. In personal finance, there is simply too much information out there for you to read, understand, and then put to use. That’s why relying on experts when you can, after you’ve vetted them out, is crucial for a successful personal finance strategy. It may be tempting to sell your own home, but is it truly feasible for you to reliably handle all the paperwork, prepare your home, list your home, manage the legal issues, and run the rest of your life? While you probably could do it, would you get the optimal result? Maybe, but you’ll definitely pick up a few gray hairs as well.

Lesson 6: Big Plays Are Nice, But Not Required

In football, kick returns for touchdowns and breakaway passes or runs are wonderful to watch - but they aren’t required. The Pittsburgh Steelers, until recently, have had an attitude and reputation of smash mouth football. The Steelers would use hard hitting runs of only a few yards to string together a touchdown drive and you couldn’t do a thing to stop it. Jerome Bettis was near perfect within a few yards of the end zone and the Steelers didn’t care if you know he was coming, there was no way you were stopping The Bus. With money, it’s always fun to hear stories of people winning the lottery or getting a huge pay raise, but those things aren’t required for you to live a financially prosperous life. What is necessary? Slow and steady wins the race, consistent saving, even if it’s a small dollar amount, can yield significant dividends down the road. (Photo by Christian Poet)

Lesson 7: It’s Never Too Late

In football, you play sixty minutes and a lot can happen in that time. Just when you think a team has been put away, something miraculous can happen as victory is snatched from the jaws of defeat. In 2000, I remember watching the NY Jets vs. the Miami Dolphins in which the Jets came back from a seemingly unsurmountable deficit. The Jets were down 30-7 with only the 4th quarter to play and they finished as victors, 40-37. Okay okay, so other than pointing out one of the greatest moments for me as a fan of the Jets (which are vying for a great draft pick this year), how does this apply? Often times people think that they’re too old to be saving for retirement. They’re too old to be doing this, that, or the other thing. You’re never too old to do that which makes you happy and saving for retirement will allow you to do whatever you want when that time comes. Even if you’re five years away, start saving because you never know.

Lesson 8: More Than Football or Personal Finance

I wanted to end the post on a somber note and that’s to say that there’s more to life than football and they’re more to life than personal finance. I think the passing of Sean Taylor, much like the sacrifice of Pat Tillman in 2004, underscored the fact that life is much greater than a game much like your life is much greater than the amount of money you’ve earned, the things you’ve acquired, and the investments you’ve made. Don’t let your happiness be dictated by the money, let it be dictated by your accomplishments and the other things in your life that truly make you happy. Whether it’s watching your kids grow up or dropping your golf handicap, personal finance should be seen as a means to an end - enabling you to enjoy your life and do the things that you want.

Happy Holidays!

A reader emailed me wondering if credit card rewards are considered income and taxed by the IRS. My gut feeling was no, because you never get any sort of 1099 and I’ve gotten more than $600 in cashback before (if someone pays you over $600 in a year for work, they are required by law to report it via a 1099), but I wasn’t entirely sure so I hit the internets to try to find an answer.

What I discovered was that the overwhelming opinion on the web was that a cashback reward is much like a discount. It isn’t considered income and the cashback reward reduces the cost basis of the item you’re buying. If you were you buy a CD for $10, get 5% cashback, and then sell it for $15 then you owe taxes on the profit of $5.50. The cost of the CD is actually $9.50, which is 5% off the original 10% price, which makes the profit $5.50.

Another prime example are those promotional “rebates” on cars. If you get a $1000 rebate when you buy a car, it’s totally different than getting a $1000 commission check (commission is income, the rebate only reduces the cost basis). When you sell the car, you have to remember that your purchase price, in calculating taxes, has to reflect the $1000 rebate you received. Cashback isn’t much different from a rebate in the sense that you’re getting a discount, not a commission for using the card. It’s a fine fine line and the IRS hasn’t given much guidance on it.

Lastly, this also means that rebates, as in mail-in-rebates on products, are also considered discounts and not income. So, if you get a $300 item for free after rebate, the cost basis of the item is $0 and you received an income of $0. (if the rebate company screws you, well then the cost basis of the item is $300!) Until the IRS comes out definitively, most tax preparers are treating cashback as a discount.

The blogosphere is chock full of things you should do at the end of the year, like making donations and saving kittens, but what about those things you shouldn’t be doing? I’ve put my brain on the subject and while I’m not a tax expert, I believe the following list is a good start of things to avoid doing near the end of the year if you want to save yourself a few tax dollars.

1. Don’t Get Married:

The marriage penalty pretty much sucks (but marriage is awesome!) and your filing status for the year is based on your filing status when the year ends, December 31st. It doesn’t matter if you get married 11:59pm on December 31st or 12:01am on January 1st, your filing status is married no matter what. Is the marriage penalty really that bad? Two singles making $70k a year will pay a total of $13,923.75 each in taxes, or $27,847.5 combined. A married couple making $140k a year combined will pay $28,192.50 - $345 more. I don’t know about you but I’d rather put that $345 into my pocket than Uncle Sam’s.

2. Prepaying Taxes & Other Unallowable Deductions under AMT

The Alternative Minimum Tax is an ugly word lots of people have been throwing around lately and it has the potential of taking a positive tax move and turning it into a hugely negative one. Prepaying certain deductible expenses, such as state/local/property taxes, early allows you to take the deduction earlier - that’s a positive tax move. However, if you are subject to the AMT, you aren’t allowed to take those deductions so you face the double whammy of prepaying your taxes (you lose interest on the money in a bank account) plus you get no benefit for doing so (tax deduction).

First determine if you’re subject to AMT (there is no 2007 calculator, I would just use the 2006). If you are, don’t prepay these normally deductible expenses (state and local income taxes and property taxes, un-reimbursed business expenses, child-tax credits, tax-preparation fees, legal fees, home-equity loan interest). If you are, then try to prepay them if you can so they can be applied to your 2007 tax bill, instead of your 2008 tax bill.

3. Don’t Sell Stock - Lower Capital Gains Rates in 2008

If you’re in the 10% or 15% income tax bracket, next year that your long term capital gains tax will fall to 0%, so wait a few more weeks if you’ve been thinking of pulling the plug on an investment.

4. Defer Compensation If You Can

The following moves all fall under the greater heading of deferring compensation because money you earn in December 2007 is taxed on April 2008. Money earned in January 2008 is taxed in April 2009 - a significant difference for such a short delay.

• 4a. Don’t Take That Bonus (Yet): Bonuses are hot but try to push the payment of that year end bonus to the new year and you can push the tax bill to next year also.
• 4b. Don’t Take A Capital Gain (Yet): Much like a bonus, don’t take a capital gain near the end of the year when you can push it to next year. The reasoning is the same - you get your cash in a few weeks and you get the tax bill in over twelve months. If you have a loss this year, you can even use that to reduce your income. (plus, you might be seeing lower tax rates)

This is part of a Money Blog Network group project in which we discuss some great year end money moves, I went against the grain with this one. If you can think of any moves one should avoid at the end of the year or have any thoughts on any of these, please do share them and I’ll add it to the post.

Yep, we’ve decided to quit our jobs and start our very own rock band! By this I mean we’re keeping our jobs and just spending hours on hours playing Rock Band, a game we just got recently (in part because Guitar Hero 3 for the Xbox 360 is so difficult to get, but now Rock Band is pretty scarce too).

We are “Sexah Thang” with me on drums and her playing the guitar. I wish I could get you guys a screen shot of my character, this guy is ridiculously over the top, but I guess you’ll have to use your imagination. Guitar Hero 3 really showed some creativity in gaming - taking a game like Simon, putting it to great music, and making it ridiculously awesome. Rock Band is like Guitar Hero except you can have two guitars (guitar and bass), a drummer, and a singer! How cool is that!?

(read full article…)

I’ve written about this in the past but I wanted to once again remind everyone about Amazon.com’s ridiculously awesome price drop policy. The rule is that if you buy the item from Amazon (not one of their third party sellers) and the price drops within 30 days, you can get the difference refunded to your account! Now that it’s the holidays and tons of stores are slashing prices to compete, nearly every order I’ve made in the last month has had a price drop.

Call of Duty 4: Modern Warfare for the Xbox 360 cost me $59.99 on November 26th, today the price fell to $39.99 and I scored myself a $20 refund to my credit card.

By far and away the best tracking site for price drops has to be Price Protectr. All you do is enter in a URL, they find the item, and then you enter an email. They send you one email when you sign up an item and then they only send future ones if the price falls within 30 days. The email they send includes all the information you need to make a request.

The text of the email I send, through Amazon.com’s system, is always a simple:

The price of this item has dropped to $XX.XX, please refund the difference to my credit card.

Nice and easy, Amazon handles the rest like a charm. They’ll just send you a form email back indicating they made the refund.

Price drops have saved me over a hundred dollars in the last month, so it’s worth the extra minute it takes to enter it into Price Protectr.

ETrade must be really hurting from recent events in the financial sector. First, they have one of the highest 6-month CD rates out there with a mere $1000 minimum (it’s 5.10% at last check) and now they’re letting their account holders trade absolutely free for one day, Wednesday December 19th.

Here are the terms and conditions of the ETrade free trade offer (there are more on that page but these are the basics):

Unlimited commission-free trade offer is valid for trades entered by E*TRADE Securities customers in U.S. stocks, options and futures from 8:30 PM EST on 12/18/07 to 8:30 PM EST on 12/19/07. Unlimited commission-free trade offer is valid for trades entered by E*TRADE Securities customers in non-U.S. stocks from 5:30 PM EST on 12/18/07 to 5:30 PM EST on 12/19/07. This offer does not include commissions on trades in mutual funds or fixed income securities, but does apply to options contract fees.

So, if you are using ETrade, use this as a chance to clean up your portfolio (do some rebalancing, take advantage of the wash rule, whatever) without paying commissions.

This is a dueling bloggers post between me and JD of Get Rich Slowly. Read his post on Using a Home Equity Loan to Pay Off Credit Cards and share with us your thoughts on the issue!

So you’ve racked up a little bit of credit card debt and you’re trying to find a way out from under the interest payments so you can make some headway. You’ve considered a few options and now have settled on tapping into your home equity to give you some breathing room - a lower interest rate and the deductibility of those interest payments. Before you transfer that debt over, let me give you a few warnings and then some alternatives that may be more attractive.

First things first, by home equity I mean tapping into a line of credit or a loan against the amount of your home that you actually own. Home equity is the value of your home minus the current balance on your mortgage and is a representation of how much value you possess in your home. When you go to the bank for a loan, they may or may not send out an appraiser to assess the value of your home to determine this number. The home equity loan will use your home as collateral against the loan, meaning if you can’t make payments they will seize it and auction it off.

The primary reason I don’t advocate the transfer of the debt from an unsecured credit card to home equity is because of the downside. If something catastrophic occurs and you are no longer able to service the debt, having it be tied to your house is much worse than having it be tied to an unsecured credit card. If you can’t make payments on your credit card, there’s very little they can immediately take away from you as a matter of process. If you can’t make payments on a home equity loan, they can seize your house and sell it. That’s because your home equity loan is backed by your home as collateral, that’s the reason why the interest rates are so much better (they take on less risk for loaning you the money).

Another reason against transferring the debt from credit cards to your home is that it doesn’t address the underlying root problem (this is for cases where the debt is the result of runaway spending, if you have the debt for reasons outside your control like medical expenses or unexpected emergencies, feel free to skip this paragraph). Your problem isn’t that you are having trouble with the payments, your problem is that you can’t stop spending. What you need to do, if you haven’t already, is to take steps to curb your spending. Whether that’s freezing your cards in a block of ice or cutting up your credit cards, you need to address the underlying problem. The danger of transferring your debt to more favorable terms and not addressing your spending is that you fix a symptom but expose yourself to much greater danger. You’ve just given yourself more rope to hang yourself with and this time you run the risk of losing your house, not just access to credit.

Lastly, there is a psychological reason for keeping the interest rate - it keeps the debt in the forefront of your mind. When you consolidate it into a home equity loan, it starts losing its significance. This is especially true if it’s a HELOC (home equity line of credit, where you have a standing line of credit similar to a credit card) and you have other projects tapping that HELOC as well. By keeping it in the “credit card realm,” you have a constant reminder that you have this debt and you have to fight like crazy to get out from under it. This is a purely psychological reason and goes against the math.

So, if not home equity, where? Keeping unsecured debt as unsecured debt while reducing your rate is key. I can think of two great options that you should consider instead of putting your house at risk:

Other credit cards! Credit card companies love revolving debt and will be willing to give you a great teaser rate in order to get you to sign on. I know a lot of people who have taken advantage of 0% balance transfer offers as a way of catching up. Now, the risk of transferring this debt to another card is that you still don’t address the underlying root problem of spending (if that’s the case), but you would need to address that regardless of the steps you took to reduce your interest rate. Going with another unsecured line of credit is significantly better than a secured line because you don’t risk your collateral if you do slip.

Prosper! Depending on your credit, Prosper is another great location to go to get unsecured credit to help you pay down your bills. You’ll have to check your credit to see what the representative rates are for your credit score but I’ve heard good things from debtors about Prosper. I’ve personally never done this so I can’t speak to it but Tricia at Blogging Away Debt has and you can read about her experiences with Prosper.

(Photo by ronaldstevens, don’t worry it’s a practice burn by the fire department)

Target recently changed their return policy to limit returns to two items each rolling 12 month period if you don’t have a receipt. I think that policy makes sense and it mirrors similar policies at other retailers and I understand that it’s meant to combat return fraud. However, someone forgot to think about the effect that will have on their gift registries, especially in the case where they fail to remove items off the gift registry and the gift giver doesn’t attach a gift receipt to the gift.

Let me give you an example, my fiancee recently had a bridal shower in which a Target gift registry was established and stocked with a variety of items such as board games. Well, when people purchased items off that list, the Target gift registry failed to remove the items from the list. You can imagine what happened next, she received multiple copies of some of the board games. Well, being a classier than average bunch, many of those duplicates didn’t come with a gift receipt taped to the box. In trying to return the items to Target, she ran smack into this new ridiculous policy. Target employees couldn’t check the registry, see that there were mistakes made on their part and give her a refund. The duplicates were Target’s fault but all their executive brains failed to identify this entirely common scenario.

I’m not writing this to complain about Target because I want them to change their policy, I could care less. I’m writing this as a warning to anyone thinking about a gift registry to skip Target’s. Target is really no different from any of those types of stores so register somewhere else and save yourself the hassle of dealing with them.

You know who does do it well? Bed Bath & Beyooooond really does a good job with their registry. If you buy it somewhere else, just give them a call and they’ll remove the item from the list. Everything is automatically 20% off, they are a bit pricier on some things, since you can find those coupons anywhere (they will accept expired coupons). And lastly, if you had it on your registry, you can return it without a receipt (the worst case is that they give you a gift card).

Who else does it well? Macy’s actually gives you a gift card or certificate worth 10% of the total value of items purchased from your bridal registry, among other similarly awesome benefits I can’t remember. 10% “cashback” is pretty freaking sweet compared to Target’s gift of a headache and a wonderfully frustrating shopping experience. So, lesson of the day is to skip Target and go elsewhere.

A reader recently sent in a question on how much it really costs you to contribute to your 401(k). I’ve always advocated that you contribute to your 401(k), regardless of whether your employer offers a match, and I will continue to advocate doing so until something drastically changes in retirement planning. Now, the reader was actually in a discussion with someone else about how your contribution to your 401(k) was cheaper than it’s actual dollar cost to you, at least initially, because of the fact that it’s pre-tax. So, let’s cover the basics and give our friend some ammunition to go back to the debate stand.

First off, it’s cheaper initially because you don’t pay tax on the funds yet. So, if you’re in the 25% tax bracket, when you contribute $100 it’s really only $75 out of pocket for you. On that basis alone, I think most would accept the argument that your 401(k) contribution isn’t as expensive as one may expect looking at nominal dollar amounts. However, let’s look at it from a different perspective, from the cost of the tax being paid (either today on non-contributions or tomorrow on appreciated 401(k) assets).

However, let’s actually compare the cost today ($25) versus the cost of the taxation in the future, given a few assumptions. First, let’s assume your money earns a reasonable 8% and inflation is a healthy 4%. Let’s also assume that your tax rate remains 25%, which is probably the most risky of the assumptions. Given the growth rate of 8%, your $100 in 40 years will be worth $2,172.45. If you tax that at 25%, that’s a tax of $543.11! $543.11 is much more than $25 right? Well, that’s $543.11 in 2047 dollars, which is only $113.12 in 2007 dollars. But isn’t $113.12 over four times more than $25? Yes, but that’s $113.12 you don’t pay today, you pay that in 40 years… the time value of money makes $113.12 in 40 years worth only $23.56 today (given the same 4% rate used for inflation). So you get more money and you pay less tax in the future, not bad!

I bet you didn’t think calculating post-tax 401(k) contribution costs could be that involved huh?

(Someone please check my math, I don’t make a habit of calculating 401(k) numbers so I could’ve gotten something wrong)