So you got yourself in trouble, eh? You spent more than you could pay off in a month, just like I told you not to. Now you’re stuck paying interest like a sucker.

Interest charges are perhaps the sneakiest of all ways to grow your debt. If you’re using credit cards for most of your purchases, and it’s starting to get away from you, you can sometimes miss the fact that you’re being charged extra money once a month for interest. But it adds up to a ton of cash over time. For $1,000 balance at a 23.49% APR, you’re talking $264 in interest over a year. That’s way too much. You’re smarter than that.

Balance transfers can be your way out, if you’re smart and careful. See, many credit cards will offer a balance transfer at a 0% APR for a promotional period of time, usually 12-24 months. This tends to cost a small percentage of the total transfer amount, somewhere between 2-4% upfront. So in general, you can make out ahead if you’re smart. Here’s the rules.

Stop the bleed

The first step is to figure out how to come up with a month to month surplus in order to pay down the debt you have. The additional interest that you’ll be removing will only be a partial recovery, you need to cut back on your spending. Remember, it’s just a promotional period. So how much do you need to cut down?

So, lets say you want to do a $5,000 transfer, at a 3% transfer fee, with a 24 month 0% APR promotional period. You’re moving off of a 15.49% APR card. So lets do some math:

$5,000 + 3% = $5,150
$5,150/24 = $214.58
15.49% APR on $5,000 = $64.95 monthly

Minimum Cuts needed: $149.63 per month

You’re going to need to find the ability to pay $214.58 per month in order to make this work. If that’s absolutely impossible, but you have good credit, you can potentially chain these deals, but that costs more money each time and isn’t guaranteed to be available.

Find The Card

You’ll need to find the right card to do this with. The first place I check is all my current open accounts. I generally have a few with 0 balance on them, and you can go on your account right now and find out if they’re making any balance transfer offers. It’s always nice to not have to open a new line of credit if you don’t have to. Be Aware that you, in general, cannot transfer a balance between two cards with the same company. That is, you can’t transfer a Chase Freedom balance to a Chase Slate card, for instance.

If that doesn’t work, check your mail. I get 2-5 mailers a week offering different credit cards with different rewards. Try to pick the one that’s right for you, and make sure you dig into the details. I generally won’t accept anything over a 3% balance transfer fee. I also try to look for the cards with the lowest rate after the promotion is over, just in case something happens and I’m unable to pay this card off. You never know if you’ll become suddenly unemployed, and having a huge APR at that time is one more thing you’d rather not deal with.

Plan Out The Timing

A Balance transfer can take weeks to process on both sides. During this time, you still have to pay your old card as if the balance is still there.  If you can, start the process of a balance transfer just after you’ve made a payment to your card. This takes out the guesswork of how much transfer needs to happen.

Also be aware that there will probably be one more extra payment next month, in order to pay for the interest accrued over the time you were waiting for processing. Yes, you legally have to pay for it, there isn’t much use fighting the charge.

 

I hope this helps as many people as possible get a little bit more out of their money. Let me know if there’s any more good tips you’ve found below, and please share this post with anyone that might need this kind of help!

The Mitochondria is the Powerhouse of the Cell.

I read a lot of Reddit, for better or worse. One running joke is that High School didn’t teach people anything useful, like how to “pay bills or do taxes” (these are two common things people say they never learned), but they learned the above statement. It’s a meme. Reddit’s kinda dumb, now that I think about it.

But this idea always sticks with me, because, well, high school absolutely did teach you how to do those things. Maybe not directly, but reading directions and doing some basic math is a corollary concept of everything you did in High School. Taxes are, for 99% of people, a very simple task they have to complete once a year. Doing your taxes often results in a tax refund, as well, so it fits in with How To Buy Stuff.

But, since so many people complain about not understanding taxes, lets do this.

Lets Talk Tax Law!

The tax code itself is a ridiculously long book of rules and regulations. I think this is probably what people think of when they get overwhelmed and say they “don’t know how they do their taxes”. But you don’t really need to know what’s in most of that book.

There’s 3 parts to the tax code. Part 1 is basically one sentence:

Part 1: All Income is Taxable.

This is pretty straight forward. Any money you make during the year is subject to be taxed as income. Now, you’re going to say “but what about…”, and we’ll get to all those questions a little later, but for now, all the money you make is supposed to be reported and taxed. On to Part 2:

Part 2: Tax Brackets

The second section describes how much taxes you should be paying, and lays out the dreaded tax brackets that cause a ton of confusion. The actual numbers where the brackets start and end can change year over year, so I’m going to use general numbers to describe this, but the first misconception that we need to clear up: You Are Not In a Tax Bracket. The money you earn gets set in tax brackets, not yourself. What the hell does that mean?

So, lets set out 3 hypothetical tax brackets. We’ll name them Level 1, 2, and 3 (because I’m creative).

• Level 1: $0-25,000 – 10%
• Level 2: $25,001-$50,000 – 15%
• Level 3: $50,000 and up – 20%

So lets say you make $55,000 per year, before taxes. You’re in level 3, so you might expect that you’d pay $11,000 in taxes (20% of $55,000), but that’s not right. Remember, you are not in a tax bracket, the dollars are. You’ll pay:

1. Level 1 dollars: 10% of $25,000: $2,500
2. Level 2 dollars: 15% of the next $25,000: $3,750
3. Level 3 dollars: 20% of the remaining $5,000: $1000
4. Total: $7,250
5. Leaving you with: $47,750

So, the math is a little more complex, but this is definitely something you learned in high school. Why do we do this? Basically, it’s so you’ll never lose money by getting a raise. Go ahead and try it it out with whatever numbers you like, starting with more money will always leave you at step 5 with more money. If anyone ever tells you they don’t want a raise, because they’ll end up paying more taxes, point them to this.

Tax brackets are described for Income, Social Security, and Medicare taxes. Those are the 3 taxes that come out of your paycheck every week, if you work for a company (which is most of you). Your employer is also paying what are called Payroll taxes for you, basically doubling what you’re paying for Social Security and Medicare. If you happen to be self employed, you’re required to pay these yourself.

Part 3: Deductions and Credits

This is by far the largest part of the tax code, and can cause a lot of confusion. But, for most people, you’ll be able to ignore most of it. Part 3 is everything that counteracts part 1, basically telling us which of our income dollars are not going to be taxed.

First, what’s the difference between a deduction and a credit? They have similar results, but are different. a deduction is an expense (something you bought) that can be deducted from your total income. So, say you had to purchase a drum for $6,000 your new online drumming business, you can say “My income started from -$6,000, meaning I only made $49,000 dollars this year”. You can see how this shifts your tax burden.

A credit is taxes that the government says you already paid just by doing what you’ve done. This is different from a deduction in that it doesn’t change where the dollars are in the tax bracket, it instead essentially pays part of your burden.

There are deductions for all sorts of things, but most don’t matter to normal people; deductions and credits are how the federal government incentivizes people and businesses to do certain things and move into different markets. That sounds a bit nefarious, but it really isn’t. The government wants people to buy houses, so they give you a deduction for that. They want you people to move towards using solar energy, so you get credits for installing them.

The main deductions and credits you need to worry about if you’re reading this are home buyers credits, child tax credits, student loan interest deductions, and business expenses. The first 3 are really straight forward, they are straight numbers or percentages of what you bought. The forms will tell you what to do. Business expenses are a little more tricky, because they depend on subjective interpretations of what is needed for your business to run. These are the sorts of things that can get you into trouble with the IRS, so my honest opinion is, if it’s an honest business expense, you should absolutely deduct it, but trying to write off the new speakers you bought for your office is probably not something you want to try.

The Forms

A lot of different letters and numbers get thrown around, and that can be a bit confusing. Here’s what the most common ones mean:

• W-4: This is a form you fill out when you first start working for an employer. It tells them how much money to deduct from your paycheck for taxes.
• W-2: This is the form that the company sends you every year to tell you how much they paid in taxes for you. It is supposed to be in the mail (or delivered electronically) by January 31st. If you don’t receive this by the first week of February, your company can be in some tax trouble.
• 1040EZ: This is what you fill out if you have no deductions and credits (besides the Earned Income Tax Credit). It is very quick and easy.
• 1040A: If you don’t plan to itemize deductions. You claim credits, but not deductions
• 1040: The full form
• 1099: This is a form sent to you by a company who is claiming you as an income deduction, but did not pay taxes for you. Basically, if you were an independent contractor, a company will send you one of these if you cost over 600 dollars. You use this to report your income.

Are You Self Employed? 

When you work for a company, so long as you filled out your W-4 correctly, they will pay your taxes quarterly. If you’re self employed, you are required to do this, or else face penalty at the end of the year. You can read more about this here.

Use some software

So, you can do this all manually, and it’s really just some addition and subtraction, albeit a bit tedious. But the online software products really have made the whole thing take less than 20 minutes. TurboTax is the big name, but I’ve heard TaxAct and CreditKarma also have very good products. I’ve been using for TurboTax for years, and I’ve never had an issue.

 

I buy a lot of things online. I have a whole blog about it.

You’d think buying things online would be easy, that there’s little nuance involved. You’d be right, mostly. It’s not all that difficult, you’ve all definitely figured it out by now. But I think there are some rules that a lot of people don’t know to follow when making purchases. The first: always use a credit card.

This is a hard one to get past some people. There’s a large portion of the population who have been burned by using credit incorrectly, and never want to see a credit card again. There’s the Dave Ramsey envelope followers who are scared the card will ruin their budgets. There’s the conspiracy theorists that  don’t want the man following them around. And, in some sense, these people all have valid concerns. But, I’m hear to tell you that using a Credit Card correctly is safer and, more importantly, cheaper than any other purchasing method. But you have to be smart about it.

So first thing: what makes it safer? The danger it protects you from is identity theft, first and foremost. When you use a credit card, you’re protected by the card company’s fraud protection services. If you ever find a fraudulent charge on your account, you call the number on the back and the charge will be reversed while it is investigated. While a check card will offer similar services, sometimes the fraudulent amount is held by the bank until the investigation is resolved. If the fraud amount is high (which it will tend to be), this can have a serious impact on your ability to pay rent, or other payments that are due. The credit card has none of these drawbacks. I would never recommend using a check card directly for this reason. Even offline, card sniffers are easily concealed anywhere you’d normally use a swipe card. Chip and Pin makes this harder, but that is not available everywhere yet.

Second reason: it’s cheaper. Most cards have some sort of rewards program available. These can give you free airline miles, cashback, or points towards purchases. So long as you’re paying off your balances every month, these rewards can add up and make all your purchases cost a little less, or get you to that vacation you’ve been wanting. But to make this work out, you’ve got to follow the rules:

Rule 1: Always Pay Your Balances.

This one is pretty straight forward. Don’t buy things you couldn’t purchase in cash. Floating purchases[1] is okay, but at the end of the month, when that bill is due, you need to be able to pay all of it. No excuses. Why? Well, with most credit cards, you don’t start accruing interest until after the due date of the statement has passed. This means that, so long as you pay your balance every month before the due date, the card is essentially free to use[2]. Holding a balance is what all those naysayers I listed above worry about when credit cards come up. If you do happen to get yourself in trouble, or want to make a larger purchase, there are other methods which I will write a whole other post about.

Rule 2: Pick The Right Card For You

Everyone is different, and there are different cards for different spending habits and goals. Are you looking to save money? Or go on cheap trips? Do you spend more on groceries or at restaurants? Are you going to be able to earn enough rewards to offset a yearly fee, or should you make sure this thing is absolutely free? Do your research. I’ve found the recommendations from Mint to be pretty good at gauging your habits.

Rule 3: Never Pay With Points

Many Cash Back cards, like the Discover It or the Chase Freedom, calculate your rewards in points and then, if you ask for cash back, pay them out at 1 cent per point. They also give you the option of purchasing some items with points directly, usually showing you an online catalog to chose an item from, everything listed in points. The two I mentioned above actually go one step further, and have deals with Amazon.com to allow you to purchase anything off their site by using points instead of a charge on the card. This seems enticing, but it is almost never a good deal. The points pay out at 1 cent per point in cash back, but generally less than that when purchasing items with points. You’re better off purchasing the item with your card, and then immediately requesting the cash back with points. Furthermore, even if the cash back/point purchase are equal payouts, you’ll miss out on the extra points you’re getting by putting it on the card. Think about it: If you pay for a $100 item with points, you got $100 free. If you buy the item with your card, then ask for cash back, you get your $100 item free, plus another $1 worth of points (assuming 1% cash back) for the purchase you just made.

This rule does not hold with miles, however. If you’re interested in flights and hotels with those types of cards, it most often beneficial to purchase through the miles system. Just make sure to do your research, and your math, in order to make sure you’re making the best use out of your rewards.

There’s plenty of other ways to make the best out of online purchases with Credit Cards. I’d suggest checking out https://reddit.com/r/churning to get a hold on how some of the experts take advantage of these deals.

[1]: Floating a purchase is buying something you can’t pay for right now, but can easily afford by the end of the month.

[2]: Some cards have yearly fees so this is not always true, but the idea holds either way.