4 Ways That Austerity Can Improve Your Life

Austerity has become a dirty word in Europe after increased suppression of spending has resulted in astronomical unemployment rates. While we like to blame these issues on the current austerity measures, we should be looking at the irresponsible spending that preceded it as the root cause of the suffering. More importantly we can take this macro-economic issue and apply it to our own personal finances to avoid similar disasters in our own lives well before the going gets tough. Avoiding overspending, or more specifically under-spending, has some major benefits besides just keeping you out of debt. There are a lot of articles all over the internet about how to save money and how to avoid spending over about $20,000 a year. However, nearly all of those are specifically geared toward helping you get out of debt once you're already in trouble. Here are a few great reasons you should want to under-spend even when you're doing well financially:

1. The "Rainy Day" Fund
The first thing that happens when you stop spending your money is that it'll suddenly start piling up in your bank account. If you've been spending your entire life (because it's there!) this will feel strange, possibly a little threatening as though you're forgetting something. The other thing you're going to feel is a sudden unflinching of your stomach that you didn't know was there. If you get into a car accident, break your arm, or have the roof of your house collapse in during a rainstorm you're no longer going to have to go into debt to deal with it.

2. Large Savings Rate = Less Comfort But Less Stress
As money continues to pile up in your savings account you'll begin to wonder why you're not spending it. You might be tempted to get a new car, or move into a nicer apartment, or make a nice down-payment on a house. You'd be wrong to do so (unless the mortgage is about the same as your rent, then it’s smart). If you keep the comforts far away you’ll find that your money keeps growing. At this point you can start referring to your savings as your retirement fund.

3. Early Retirement/Financial Independence
Depending on how much you make you'll find that within a decade or two you've saved up several hundreds of thousands of dollars. If you invest it properly at this point the revenue generated by the money you have will be enough to live on, meaning you're ready to retire. If you're just finishing college as you read this and starting your first real job, that means that you could retire as early as your mid-thirties contingent upon how much money you make during that time. That means financial independence while you're still young enough to properly enjoy it.

4. Wealth (Sort of)
If you decide to keep working past the point where your investment makes just enough to support you, you'll get to the point where your investment produces more than you need. If you don't spend it, but instead add it on to your investment continuously the amount of money you make will continuously grow for the rest of your life.

About the Guest Author
Alan Brady is a real estate and financial enthusiast who loves to blog about personal finance, renting, home ownership and responsible practices for mortgage lawyers.

Flex Spending Accounts for 2013

It is that time of year again when companies hold their annual open enrollment. This is when employees have the opportunity to change medical or dental plans, and to opt into making contributions to a flexible spending account (FSA). In general, a flexible spending account allows one to deposit pre-tax dollars into the account to pay for medical expenses, or to pay for dependent care. (Note that these are two different types of accounts.) The ability to use pre-tax money to pay for expenses is a good benefit that can save you money.

Starting in 2011, there was an important change to FSA plans. Specifically, the rules have changed for the purchase of over-the-counter (OTC) medicines and drugs (such as OTC allergy medicines, pain relievers, antacids, cough medicine, etc.). This change is due to the federal health care reform law, the Patient Protection and Affordable Care Act of 2010 (PPACA). (This was a part of President Obama's health care reform plan.)

Previously, all of these OTC purchases were covered by flex spending accounts. However, starting in 2011 these OTC drugs and medicines cannot be reimbursed through an FSA unless they are prescribed by a medical practitioner to treat a specific medical condition. So, the bottom line is if you plan to purchase these OTC items through a flexible spending plan, you'd better have a prescription first.

One other thing to keep in mind when contributing to an FSA is that most flex spending accounts operate on a "use it or lose it" basis. This means that any balance you have in the account at the end of the calendar year is forfeited to your employer. This is something that I would rather not do, since I never want to leave any money on the table.

Warning:
In the current economy, I also want to warn my readers of one more potential hazard with FSAs. Having been downsized twice in the last decade, I can tell you that the "use it or lose it" provision also applies if you are terminated without cause (i.e., laid off). Any money that you have left in your FSA plan when you are terminated will be kept by your former employer. This may seem totally unfair, but that has been my real life experience.

PFS

Why Invest in the Stock Market?

If you are new to investing, the stock market can seem like a confusing and intimidating place to put your money. At a first glance, it might seem to make sense to avoid this havoc and just put your money in the safety of a bank account or government bonds. However, if you aren’t investing in the stock market, you are missing out on one of the most lucrative places to put your money. Here are some of the top reasons why you should consider putting some of your money into the stock market.

High Returns
Stocks are risky assets. This means that they don’t guarantee a rate of return and can even lose money any given year. However, while stocks sometimes lose money, their long-term performance is undeniably positive. Over the past 50 years, the stock market has earned an average return of 10% per year, according to the Federal Reserve. Over this same time period, a guaranteed investment like government bonds only returned 5% per year, barely enough to keep up with inflation. If you are going to grow your savings to reach your financial goals, you need to invest in a high return asset like stocks.

Lower Taxes
Taxes are a major drag on your investment return. When your investments earn income, like interest payments from bonds or rental income from investment properties, you need to report this money as taxable income right away. This raises your tax bill for the year and leaves you with less money for investing.  Stocks, on the other hand, can delay the taxes on your gains. If a stock price goes up, your total portfolio becomes more valuable. However, you don’t need to report that growth as income until you eventually sell the stock. This can push off your tax bill for years.

In addition, when you sell a stock for a gain, it is taxed as a capital gain and not as income. As long as you owned your stock for at least one year, the gain is considered a long-term gain. The current long-term gain tax rate in the United States is 15%. The income earned from your other investments is taxed at your personal income tax rate. By investing in stocks, you pay a lower tax rate on your gains.

Liquid Investments
Stocks are also liquid investments. This means that they are quick and easy to turn into cash. If you need some extra money, you can sell off some stock right away. You’ll only need to pay a small brokerage fee and you’ll get your money within a few days. Other investments are not nearly as liquid. If you invested your savings into rental properties instead, your money is locked up. Converting these assets into cash is a long and expensive process. When your money is in the stock market, you won’t have this problem.

The stock market isn't perfect. Many greedy and irresponsible investors have lost money in stocks. However, if you learn how to be a disciplined, smart, and responsible investor, you’ll be able to make the most out of the stock market’s many advantages.

About the Guest Author
Patrik Fonce is a writer and works currently at QuantShare Trading Software.

Don't Make These 7 Credit Card Mistakes

While credit cards get a bad reputation on the Internet, they actually can do you a lot of good if you know how to use them properly. Since there’s a rather good chance that you have some sort of credit card in your wallet, you will want to make sure that you avoid these seven mistakes that can cost you a lot in the long haul:

#1 Paying Bills Late
One of the biggest problems you can encounter when paying your bills off can include paying your bills off late. Aside from the late fees that credit card companies charge you, these companies can also jack up your interest rate and let’s not forget that it’s going to hurt your credit score. For example, let’s take one of Chase’s popular cards, the Sapphire Card. In the fine print, it notes that if you miss one late payment, your interest rate can go from a low 9.99% to a whopping 29.99%! Experts note that late fees are often 40% of your FICO score.

#2 Transferring Balances
Transferring your debt from one card to another may sound like a good idea but what you have to understand is that most, if not all credit card companies are going to charge a transfer fee. Generally, this fee is going to be around 3% to 5%. So if you’re going to transfer your $5,000 balance, plan on pending at least $150 in fees. The key here is to make sure that you understand your balance transfer rules and always make sure that you do your math to see if it makes financial sense.

#3 Minimum Payments Kill You
As a rule of thumb that you have heard – if you can’t afford to pay your card off in full at the end of the month, don’t use your card! Well sadly, some people just don’t follow that tip. If you’re finding that your credit card balance is getting out of control, you may be making the minimum payments. Yes, while this is better than paying nothing, you have to realize that by doing so, your credit card balance is going to linger for a long time. For example, let’s say that you have a balance of $5,000 with an interest rate around 14%. If you just paid $100 a month, it would take you over 20 years to pay it off! So the next time you consider paying the minimum, consider throwing a few more dollars toward it.

#4 Not Looking at Statements
Believe it or not but many people just throw their statements away after they pay. What many don’t realize is that mistakes can happen on the statement. Things such as unnecessary fees, fraud and jacked up interest rates can kill you in the long run. Always make it a habit to check your statement to make sure that everything makes sense because you never know what may be on it.

#5 Taking Cash Advances
Yes, there are going to be times when you need cash now. While it may be tempting to plop your credit card in the ATM, you have to realize that cash advance fees can really come around to haunt you. On average, some credit card companies can tack on a minimum advance fee and a high interest rate. For example, a popular Citibank card will take on a $50 fee and 25% APR if you take out $1,000! As you can see, that can add up fairly fast. The longer you take to pay it back, the quicker the interest is going to hit you.

#6 Using Rewards the Wrong Way
Yes, many credit cards on the market do offer some great rewards, but sadly, some people don’t know how to use them properly. What you have to realize is that if you’re not paying your card off in full each month, you’re not taking advantage of rewards, and let me explain why. See, the interest you’re going to have to pay will usually outweigh your rewards nine times out of 10. In general, when using your rewards, just make sure you’re using them the right way.

#7 The Annual Fees
As our last tip, the last thing that you’re going to want to look at is the annual fees. While there are fantastic cards out there that have annual fees, you have to ask yourself if it’s worth it. For instance, let’s say that you spend $100 on the card for the year but it has an annual fee of $75. Is that worth it to you? It’s probably not! So with that being said, make sure that the rewards far outweigh the annual fee if you’re paying one.

About the Guest Author
This post was provided by Hannah Munson. She helps run Howmuchisit.org. If you are interested in writing a guest post, please contact PF Stock at the Email address listed in the sidebar.

Citi Dividend Card Q4 2012 Categories

I had written before that I have a Citibank Dividend MasterCard. One of the benefits of this card is that it offers 5% cash back on rotating categories of merchants. The main problem I have with this arrangement is that I always forget which categories are currently offering 5% cash back when I am at the store. As a result, I often miss out on the bonus dividend dollars. In order to help me remember, I have decided to post the categories which change every three months here.

For Q4 2012, you will earn 5% for purchases from:

• Macy's
• Electronics Stores
• Toy Stores

Note that "Q4 2012" means from October 1 - December 31, 2012. Also note that even if you have a Citi Dividend Card, the enrollment is not automatic. You have to login and sign up for this offer at the Citibank website.

PFS

The Cost of Print Magazines

A few weeks ago, I mentioned that SmartMoney Magazine had ceased publication. At the time, I also mentioned that I still subscribe to the print versions of Money Magazine and Kiplinger's Personal Finance. In their October 2012 issue, Knight Kiplinger also mentions that SmartMoney is ceasing publication, but he is not gloating about losing a competitor.

He has some interesting commentary about the cost of finance magazines. It seems that consumers are willing to "pay $4 for a latte at Starbucks", but "balk at paying even $1 for an issue of a useful magazine." I think that Kiplinger really has a point here because in this age, there is plenty of free information on the internet. And these are some of the same issues that he faces as the editor of Kiplinger's. However, I often prefer to hold a physical magazine in my hands.

So let me ask, how much is a print magazine worth? Would you pay $12 for 1 year of Kiplinger's Personal Finance magazine? Or if you prefer Money magazine, would you pay $15 for 1 year of Money Magazine? There is even an offer to get 5 issues of Money for only $5. I think that it will be interesting to see what readers responses will be.

PFS

How Much Do You Make - Survey Results

The final results are in for the PFStock annual income poll in the sidebar. I've asked readers to respond to the question: "How much do you make?" There were 76 responses in all. Here are the final poll results for PFStock's current income survey:

How Much Do You Make (September 2012 Results)

Annual Income	2011 Survey	2012 Survey
less than $50k	8%	13%
$50k-$99k	25%	27%
$100k-$149k	27%	28%
$150k-$199k	11%	17%
$200k-$249k	8%	7%
$250k and higher	18%	5%

Note that the percentages do not add up to 100% due to rounding. From these statistics, I found that there has been a big decrease in the number of respondents who claim to make more than $200k per year. This makes wonder if people are feeling less rich this year. Does anybody have a comment on this statement?

The last time that I published annual income survey results was in my April 2011 post on the topic. In comparing these statistics, I see that there is a bit of a shift away from the higher income ranges. Does this mean that the economy is once again stagnating in 2012?

Here are some other interesting related posts:

Annual Income Survey (2/10)
How much do you make? (4/09)
Net Worth Update (8/09)
Net Worth Comparison (6/08)
Are You Wealthy? (3/08)
Calculating Net Worth (9/06)

PFS