Small business year end tax tips

Since I have already started making my year end moves for my small business, the CNNMoney.com article Five small business tax tips to take before Dec. 31 was a good sanity check for me.

Although tip #5 equates to Don't take any unallowed deductions, the other tips are good ones that I have used in my own small business:

1. Contribute to a retirement plan: To help minimize taxable income, I try to max out my SEP IRA contribution every year.
2. Defer income: I use Cash Basis Accounting for my business (where revenue is recognized when payment is received), so I have the option of deferring revenue until 2007 by simply waiting a couple of weeks before sending out invoices to my clients. I typically avoid doing that though, because clients don't always pay their bills on a timely basis.
3. Increase expenses: I often buy business equipment and office supplies at the end of the year because I know how much cash I have on hand. I have already purchased a new laptop computer and laser printer this month, and have been keeping an eye out for a good deal on a Dell desktop with an Intel Core 2 Duo processor.
4. Pay bills now, not later: I will pay as many bills as possible (health insurance, credit cards, phone, internet, etc.) before December 31 so I can take the deduction for the 2006 year

Nov 30 Issue T-Bills: 4 Week Yield (5.39%) Leads the Pack

I jumped back on the bandwagon and made my latest T-Bill purchase two weeks ago. As CD rates continue to drop, T-Bills are still an attractive place to stash short term cash.

For November 30 issue T-Bills, the inverted yield curve continues as 4 week T-Bills (5.39%) topped both 3 month (5.13%) and 6 month bills (5.20%).

Using the new and improved handy T-bill tax equivalent yield spreadsheet developed by contributors to the FatWallet discussion on Treasury Bills, let's compare yields of 4 week T-Bills for states with various income tax rates: high (CA 9.3%), medium (MA 5.3%), and none (TX 0%):

APY Type	CA (9.3%)	MA (5.3%)	TX (0%)
Unadjusted	5.393%	5.393%	5.393%
Non-Itemizers@15%	6.055%	5.751%	5.393%
Non-Itemizers@25%	6.156%	5.803%	5.393%
Non-Itemizers@28%	6.193%	5.821%	5.393%
Non-Itemizers@33%	6.262%	5.856%	5.393%
Non-Itemizers@35%	6.293%	5.856%	5.393%
Itemizers	5.946%	5.695%	5.393%

This data shows that 4 week T-Bills are an excellent place to park short term cash even for residents of states with moderate income taxes. As long as the current T-Bill rate trend continues, I will be putting the proceeds from some savings bonds and maturing T-Bills into a 4 week T-Bill in mid December.

Poll: Do you prefer fake or natural ones?

As my children begged us to put up our Christmas tree last night, I wondered where people stand on the artificial vs. real Christmas tree debate.

What's Best, a Real or Artificial Christmas Tree? Real Artificial    pollcode.com free polls

Before we had children, my wife and I used to tag and cut a Christmas tree at a local farm every year. This involved quite a bit of time and effort, but it was an enjoyable part of our holiday tradition.

That all changed once our first child was born, as we quickly figured out that lugging a cranky baby around a farm in the cold weather was not enjoyable for any of us. Fed up, we ended up over-paying for a pre-cut tree at the farm and headed home.

Since then, our Christmas tree tradition has devolved into to a $20 cheapie that I picked up by myself from a vendor on the side of the road to a $120 artificial tree that we bought two years ago.

While most of my spending is driven by the numbers, the convenience of not having to do all of the work that a real Christmas tree requires is worth every penny. Heck, I may even come out ahead if I can more than 6 years out of the fake one. :)

Toysrus.com: Reusable $10 off $30 Purchase with Google Checkout

Although the Google Checkout $10 off $30 and $20 off $50 deals at Buy.com have been getting most of the headlines, I wanted to remind holiday toy shoppers that the $10 off $30 Google Checkout deal is also available at toysrus.com.

I was doing some online Christmas shopping last night and ended up buying a few toys online at the Toys R Us site due to its free shipping promotion combined with the $10 Google Checkout savings.

I made an additional Toys R Us purchase this morning and realized that the $10 off $30 offer was reusable! It's definitely worth checking out if you still have some holiday toy shopping to do.

My 6 month financial goal

I'm a little late to the party, but Jonathan at MyMoneyBlog has asked everyone to share our own 6-month financial goal.

Here's mine:

To get my financial assets over the $500,000 level.

I'm currently about $20,000 short, but hopefully I can get there with my remaining 2006 SEP IRA contributions and a little help from the stock market.

I love things that are great!

Happy Thanksgiving!

Since today is a holiday, let's have a little fun by enjoying this YouTube clip of Alec Baldwin's Tony Bennett sketch on Saturday Night Live, featuring surprise guest Anthony Benedetto (the real Tony Bennett):

Choosing the Fidelity 529 College Savings Plan index fund portfolio

I've been contributing to Fidelity 529 college savings plans for my children for a few years now and was very pleased to see that they announced fee cuts and a new low cost index fund investment option.

I decided to move to the new age-based index fund portfolio, where contributions are invested in Fidelity index mutual funds and designed for the designated beneficiary’s birth date. Since the 529 plan allows an exchange of existing investments once per calendar year, I wanted to make the exchange immediately to give me some flexibility in 2007 if increased competition causes Fidelity to offer an even more attractive investment option next year.

The exchange process was quite simple:

• Download form 529 College Savings Plan Investment Instructions from Fidelity.com: link.
• In Section 1, choose to make your annual exchange and move existing 529 investments to the Age-Based Strategy (Index Series).
• In Section 2, choose to make all future contributions to the Age-Based Strategy (Index Series).
• Section 3 (optional) allows you to make an additional contribution to your 529 account.
• Sign section 4 and mail the completed form to Fidelity at the specified address.

Although increased competition has caused some nice price cuts for investors, I am still disappointed that the Fidelity 529 rewards MasterCard has been discontinued. Win some, lose some...

Are food pantries overwhelmed where you live?

As someone who sits in a comfy chair blogging about saving and investing, I tend to lose sight of how fortunate I really am. While inflated energy and housing costs have impacted everyone, it has been particularly hard for low-income families to make ends meet:

High fuel prices this year have hurt many low-wage earners by forcing them to choose between heating their homes or buying food.

We try to do our part by making an annual donation to an area food share, sending in some groceries to food drives at the schools our children attend, and by dropping off a few items in the donation baskets at our local Shaw's Supermarket.

So why not help out someone less fortunate by spending a few bucks on some canned vegetables, cranberry sauce, or Stove Top stuffing and donating them to a local food drive? And while you're at it, don't forget to maximize the bang for your buck by doing some aggressive grocery shopping.

Bankruptcy in the making

Do you know someone who lives in an amazing house, drives an expensive new car, and takes incredible vacations? Do you wonder how they pay for it all? Allow me to share the true story of an acquaintance of mine, who I will call "Ken" for our purposes here.

On the surface, Ken and I have quite a bit in common:

1. We're both in our mid thirties.
2. We're both married to a stay-at-home mom and have two kids
3. We both own our own home
4. We hold similar jobs in the IT business

Unfortunately, that's pretty much where the similarities end. There is one big difference between Ken and me though: he and his family are hyper consumers who live far beyond their means.

Background

I first became acquainted with Ken about five years ago as he was a great technical resource for some home theater gear I had bought. Sadly, Ken ended up losing his job and managed to scrape by with credit cards and selling open box home theater components on Ebay until he found a new job a few months later. You would think that this new debt and diminished savings would make Ken more cautious with his money, wouldn't you? Oddly, Ken and his wife instead began a major spending spree that continues to this day.

Not long after Ken started his new job, he bought himself a brand new 2003 Acura CL-S (MSRP $30,550). Three months later, he bought a brand new 2003 Acura MDX (MSRP $36,400) SUV for his wife. Ken then sold his modest house in the Northeast and took a new job in another part of the country (with lower housing costs) where he purchased a beautiful new home in an upscale development that was more than twice the size of his previous house. He described his finances as "tight", but he and his family were very happy with their new life.

A spending frenzy

That's when the spending really started to take off. A little more than one year after he bought his new 2003 Acura sedan, Ken traded it in and bought a brand new Ford F150 pickup truck for $28,000. One year and a half later, Ken and his wife decided that their 2003 Acura MDX was "too small" for his family of four, so they traded in the Acura MDX and his Ford F150 and bought his wife a brand new Lincoln Navigator SUV (MSRP $49,325) and him a used 2005 Ford Taurus ($12,000) with the understanding that Ken would replace the Taurus the following year with a new car of his choice. Five months later, even though it could be considered "wasteful", Ken traded in the Taurus and bought a brand new 2006 Mustang GT convertible (MSRP $29,965). Fortunately, Ken had developed a good relationship with the salesman at the Ford dealer, who "really took care" of him.

This spending frenzy has continued with many things, but the expensive family vacations (Disney Cruises, etc.) stand out the most (six $6,000+ vacations in three years).

An uncertain future

The numbers are frightening when I consider the debt that piled up when Ken was unemployed, the new home, the $180,000 spent on new cars in three years, the vacations, etc. Consider this about Ken and his wife:

• They have probably spent about $10,000 on sales tax just for their car purchases over the last three years.
• They have car payments in excess of $1300 per month.
• They have very little equity in their new home, which likely carries a mortgage payment in excess of $2000 per month.
• They have little retirement or college savings.

Ken and his wife have decided to live for today at the expense of tomorrow, but I'm not sure why someone would willingly put their young family in such a dire financial situation. Perhaps they don't care, or don't know any better, or are just trying to fill some void in their life with "stuff". How sad...

HSBC Direct survey: possible online savings rate increase

It appears that HSBC Direct is considering a tiered rate structure for its online savings accounts. Yesterday I received an email from HSBC Direct requesting me to participate in a confidential survey. I was curious about the survey, so I decided to take it. They had me hooked right from the start with the following statement:

HSBC Direct currently offers 5.05% on all online savings account balances, but is thinking about offering higher rates on accounts with higher balances. Please select the number from "1" to "6" that most accurately reflects which of the following rate options you would prefer HSBC Direct offer.

I continued with the survey and was initially asked if I would prefer to receive a gift or a higher rate of return in exchange for depositing additional money at HSBC. Fearing a gift of a cheesy HSBC tote bag, I said that higher rates would make me more likely to transfer additional cash to HSBC.

For the rest of the survey, I was presented several rate tier levels (mainly $10,000, $25,000, and $50,000) and corresponding rates (upwards of 5.7% for one $50,000+ balance scenario) and asked what percentage of my available cash balance I would allocate to HSBC and 3rd party accounts.

Based on the questions I was asked, I'm guessing that HSBC is considering a rate tier structure competitive with someone like Countrywide Bank (maybe 5.05% < $10,000, 5.25% $10,000+).

Since I haven't seen this survey reported elsewhere (Bank Deals, FatWallet), I assume that this is a pretty targeted invitation. In my case, I had a pretty large balance at HSBC earlier this year, but eventually moved most of my cash out of there as I bought into higher rate T-Bills and CDs. I'm guessing that HSBC wants me to put more of my money back into their coffers, which I will certainly consider doing if they bump up their rates a bit...

Fidelity 529 2% rewards MasterCard discontinued

More fallout from the MBNA/Bank of America merger.

I received a letter from FIA Card Services (the post-merger MBNA card servicer) today indicating that the 2% rebate Fidelity Investments 529 College Rewards MasterCard has been discontinued and replaced with a 1.5% rebate Fidelity Investments 529 College Rewards American Express Card:

Please note that while the Fidelity Investments 529 College Rewards MasterCard credit card will no longer be offered to new customers, the points program, features, and benefits of your existing MasterCard credit card will not change as a result of this new Card offer. Your existing account will not be automatically converted to the new 529 College Rewards American Express Card and you will not receive the new Card unless you choose to apply for one.

Although it appears that I will be able to keep my existing card (for now), it's disappointing that this card will no longer be available. The 2% rebate on all purchases made it a nice companion card for the various 5% gas/grocery/drug store cards out there.

Homeowner Savings: DIY toilet replacement

My wife and I had been cursing the builder-grade low flow toilets that came with our house for eight years. These duds needed plunging on a weekly basis and dripped puddles of condensation all over the floor on humid summer days (due to cold well water).

After the "contents" of a diaper clogged our toilet for the umpteenth time, I was finally fed up enough to take action. I did some research online, and was fortunate enough to stumble upon terrylove.com (previously mentioned here), the web site of Seattle, WA plumber Terry Love. Love's site had lots of good plumbing information, including consumer reports on toilets and a Plumbing & Remodel advice forum.

After reading the glowing reports of the Toto Drake toilet and the corresponding installation overview, I decided to buy a Toto Drake toilet and attempt to install it myself.

The required materials cost me a total of $269.69: a Toto Drake toilet with an insulated tank ($263.55), a flexible supply tube ($3.48), a wax ring (89¢), and a set of closet bolts ($1.77). This Toto toilet does not come with a toilet seat, so I saved a little money here by reusing our existing one. I also had to pay a $5 disposal fee to get rid of our old toilet at the local transfer station, but I was just happy to be rid of it.

Following the installation instructions at HammerZone.com I spent about 1½ hours installing the new toilet. Fortunately, I encountered no problems and had no leaks.

The Toto Drake has worked out very well for us, and we haven't had to plunge or wipe up condensation from the floor (due to the insulated tank) since it has been installed. We were so pleased with its performance that I also replaced our other lousy toilet with another Toto.

I got a lot of satisfaction out of my small DIY plumbing project, but that has come with a downside: my wife now wants me to upgrade our bathroom sink, faucet, and vanity top!

10 Rules for raising financially independent children

I was re-reading my copy of The Millionaire Next Door recently, and although this book doesn't delve into the mechanics of saving and investing, it has always been an entertaining read for me. I particularly like the values that this book stresses: discipline, thrift, saving, investing, and living beneath your means.

As a parent, the case studies that document adult children who are the recipients of economic outpatient care (EOC) from their wealthy parents really jump out at me. EOC is the euphemism that the authors use to describe an allowance that parents give to adult children, which ultimately makes these children financially dependent on the wealth of their parents.

To me, the thought of my children never gaining financial independence is a frightening one! I certainly wouldn't be doing them (or myself) any favors by supporting them financially for the rest of their lives. In fact, they are probably already tired of my continuing reinforcement of the importance of saving and frugality.

This brings me back to a section of the Millionaire Next Door that discussed a list of guidelines that wealthy parents used to produce successful adult children:

1. Never tell children that their parents are wealthy.
2. No matter how wealthy you are, teach your children discipline and frugality.
3. Assure that your children won't realize you're affluent until after they have established a mature, disciplined, and adult lifestyle and profession.
4. Minimize discussions of the items that each child and grandchild will inherit or receive as gifts.
5. Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
6. Stay out of your adult children's family matters.
7. Don't try to compete with your children.
8. Always remember that your children are individuals.
9. Emphasize your children's achievements, no matter how small, not their or your symbols of success.
10. Tell your children that there are a lot of things more valuable than money.

Pretty good advice in my book...

Nov 16 Issue T-Bills: 4 Week Yield (5.37%) Leads the Pack

Wow, T-Bills are competitive again! I just bought a 28 T-Bill, my first T-Bill purchase since late August.

For November 16 issue T-Bills, the yield for 4 week T-Bills (5.37%) topped both 3 month (5.19%) and 6 month bills (5.22%).

Using the new and improved handy T-bill tax equivalent yield spreadsheet (courtesy of the FatWallet discussion on Treasury Bills), I'm happy to see that my tax equivalent yield for this bill will be 5.67%. As long as T-Bill rates continue to be attractive, I will probably make another T-Bill purchase when this one matures on December 14th.

Ben Stein: Buy index funds and lay off the marijuana

Ben Stein's How Not to Ruin Your Life column had a humorous posting yesterday: A Formula for Long-Term Happiness.

The main focus of the article is about the many advantages of investing in low cost index funds:

The data is overwhelming that even the best stock pickers do not, over long periods, beat the large indices like the Dow and the S&P 500 or larger indices like the Vanguard Total Stock Market Index.

Stein humorously adds to the discussion that successful investors also need to lay off the drugs and alcohol:

It's an amazing thing, but it's true: The men and women I know who have spent a lot of time smoking pot have, by and large, thrown their lives away in the pursuit of feeling no pain. There are exceptions, but typically they can barely get out of bed, let alone pursue a career aggressively or save in a disciplined way.

I got a good chuckle out of this article, and may have to start reading Stein's stuff on a regular basis. This article was certainly a "must read" in my book.

Finding a home improvement contractor

As a homeowner, I hate trying to find a competent and reputable contractor when I need to have work done. Next to cost, this is the main reason that I try to do as much home and auto maintenance and repair work myself as possible.

Bruce Mohl's Consumer Beat column in yesterday's Boston Sunday Globe had some good resources that homeowners could use to help them choose contractors, equipment and materials.

Here are some of the contractor resources that I found particularly useful:

• Angie's List: Contractor reviews and ratings by other homeowners.
• Consumers CHECKBOOK: Contractor reviews and ratings by other homeowners.
• ServiceMagic: Contractor referral site.
• HVAC-Talk: Heating, Air & Refrigeration discussion forums.
• TerryLove.com: Plumbing product reviews and discussion forums.

November 2006 Financial Asset Roundup

Here are my current financial assets as of the market close on November 9th, 2006:

Asset	Oct 2006	Nov 2006	Change
Checking	451	602	151
Money Market	19,016	23,295	4,279
Savings Bonds	15,795	14,172	-1,623
Treasury Bills	21,000	19,000	-2,000
CDs	40,091	40,237	146
Brokerage	88,014	88,326	312
401k	89,010	91,799	2,789
Roth IRA	25,747	26,363	616
SEP IRA	135,995	146,603	10,608
529 Savings	29,026	29,886	860
Total Assets	$464,145	$480,283	+$16,138 (3.5%)

The strong stock market once again gave my investments a nice boost over the past month and I have continued rotating my cash holdings out of I Bonds and T-Bills and into my HSBC online savings account. I will probably buy another 28 day T-Bill next week since T-Bill rates have started to become competitive again (5.324% APY at last auction).

I added an $8,000 contribution for the 2006 tax year to my SEP IRA since my last update, which accounted for half of my gain this month.

Fight cancer with your computer

I have been participating in the United Devices Cancer Research Project for about five years now.



Here's how it works:

To participate, you simply download a very small, no cost, non-invasive software program that works like a screensaver: it runs when your computer isn't being used, and processes research until you need your machine. Your computer never leaves your desk, and the project never interrupts your usual PC use. There is no cost to participate and no impact on your computer use. The project software cannot detect or transfer anything on your machine but project-specific information. It just allows your computer to screen molecules that may be developed into drugs to fight cancer. Each individual computer analyzes a few molecules and then sends the results back over the Internet for further research. This project is anticipated to be the largest computational chemistry project ever undertaken and represents a genuine hope to find a better way to fight cancer.

If you would like to volunteer your idle CPU resources in the fight against cancer, the UD agent software can be downloaded at grid.org.

Money Magazine says I can't afford a median priced home in MA

I was reading the 25 Rules to Grow Rich By pullout feature in my November 2006 copy of Money Magazine, and had to chuckle when I read Rule #3:

Spend no more than 2 1/2 times your income on a home. For a down payment, it's best to come up with at least 20%.

So let's see... According to this Boston Globe article, the Massachusetts Association of Realtors reported the median selling price for a single-family house in Massachusetts was $360,000 in September. Using the 2 1/2 times income criteria from Money Magazine, you would have to make at least $144,000 per year to purchase a median-priced home in Massachusetts.

That seems to be quite a disconnect from the $50,502 median income as reported by the Washington Post. Applying the handy dandy 2 1/2 times income rule once again determines that a median income family in Massachusetts should spend no more than $126,255 on a home. Let's just say that amount of money would have bought you a decent starter home in Massachusetts TEN YEARS AGO.

While I am picking on Money Magazine a bit here, there are plenty of attention grabbing Ten Mutual Funds to Buy Now! type articles out there. You just have to be sure to separate the wheat from the chaff.

My Best and Worst Money Moves Ever

Jim at Blueprint for Financial Prosperity has asked everyone to share our own best and worst money moves ever.

Here are mine:

My Worst Move

Initially going into the IT consulting business with partners who could not generate consulting revenue at the rate that I could. I ended up subsidizing their salaries at my own expense which created quite a bit of anger and resentment on my part. While I did make a nice living, I cost myself a lot of income by not initially having the courage to start the business on my own.

My Best Move

The purchase of my home. My wife and I bought our place in 1997 right before the recent housing boom started. The purchase price of our home was far more than I had intended to spend at the time, but it is now worth twice what we paid for it nine years ago.

This graph from the New York Times illustrates how fortunate we were to buy our house in 1997:

Are you defensive?

With any of your stock holdings, that is.

Michael Sivy of Money Magazine writes about holding defensive stocks to balance the growth investments in your portfolio (The ultimate defensive stock). I found the timing of this article to be interesting since stock traders like Jim Cramer have declared that now is the time to dump defensive consumer products stocks in favor of growth stocks (like technology) since fears of a recession have decreased of late.

Even more interesting, I happen to own what Sivy considers to be the ultimate defensive stock: Proctor & Gamble (PG).

I generally prefer to be an investor in mutual funds and not individual stocks, but I have to agree with Sivy on this one. The reasons for owning P&G stock make sense if you think about it:

• Consumers will continue to buy toothpaste, shampoo and laundry detergent even during a recession
• P&G is primed for steady sales growth
• P&G currently pays a dividend of thirty-one cents per share, and has raised dividends for 50 consecutive years

How To Be a Smart Investor

The Parade Magazine that came with yesterday's Sunday Boston Globe had a nice article by Lynn Brenner about a basic investing strategy: How To Be a Smart Investor.

The article summarizes five main steps toward becoming a successful investor:

• Determine your goal
• Make a plan
• Rebalance your investments
• Shop around
• Keep it simple

I'm a big fan of using a simple investment plan with low cost index funds to build wealth, and this article is a great place for notice investors to start (perhaps followed up by The Bogleheads' Guide to Investing).

Grocery Deal: Make money buying Pringles

Shaw's Supermarket is having a Proctor & Gamble promotion (through November 9th) where you get a $3 checkout coupon with the purchase of 3 participating P&G products or a $10 checkout coupon with the purchase of 5 participating P&G products.

For my money, the best way to approach this deal is by purchasing five (5-6 oz.) cans of Pringles potato crisps, which are on sale for $1 each. Doing so will put an easy $5 profit in your pocket simply by spending $5 on Pringles and receiving a $10 checkout coupon for your trouble.

This deal could be even better if you have happen to have some Pringles coupons on hand, but the coupons from the 10/1/06 Proctor & Gamble coupon booklet have expired and the previews for the 11/5/06 Proctor & Gamble coupon booklet indicate that no Pringles coupons will be included this week.

American car buyers just don't get it

With gasoline prices at $3 per gallon as recently as three months ago, many Americans saw their discretionary spending cash take a noticeable hit. SUV and truck sales plunged and demand for hybrid vehicles soared.

Apparently American car buyers have amnesia, since October auto sales data shows that SUV and truck sales went through the roof as gas prices have pulled back toward $2 per gallon.

I was hopeful that the latest gas price surge would encourage consumers, auto makers, and the government to find ways to conserve energy resources, reduce our dependence on foreign oil, and explore alternative sources of energy. Sadly, it will probably take a few more price shocks of $5 or $6 per gallon gasoline to get the job done.

Isn't anyone else sick of lining the pockets of oil-rich foreign countries that hate us and our way of life? Anyone? Bueller? Bueller?

Time to cash in August issue I Bonds

I continued my I Bond liquidation today and cashed in the I Bonds that I bought in August 2003.

While my existing I Bonds aren't an attractive holding with an earnings rate of 2.11%, the Treasury announced today that they will leave the fixed interest rate portion at 1.4% for November 2006 issue I bonds. Although the 4.52% composite rate is less than what many money market accounts are now offering, it may be a nice place to put cash in April 2007 if 5% money market rates are no longer available early next year.