What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Retiring at age 50
2. Return to work or not?
3. Handling an inheritance
4. Christmas games
5. Money and relationships
6. Housing predicament
7. Pie options
8. 40/30/30 question
9. Wanting frugal gifts
10. Sleep remedies

The days leading up to Christmas are always filled with excitement and energy. There are tons of little things to remember, checklists to fulfill, items to wrap and prepare, and last-minute emergencies to handle.

I’m actually thankful that Christmas comes just a little bit after the shortest day of the year (December 21). It gives us something to occupy our minds when the days are grey and very short.

Q1: Retiring at age 50
I’m 31 and I have a goal of retiring at 50. Like any other goal, I have a realistic plan to make it happen, and metrics to track my progress.

We’re a family of 5 and our monthly expenses are about $8k/month. I figure when the kids leave the house, it’ll be around $5/month (in today’s dollars).

Our current retirement savings are in the low 6-digits. 401k and Roth IRA, invested in Vanguard’s Target Retirement 2040 Fund. I add about $25k per year, depending on how much I can bring in. The IRA is maxed out, and the 401k is funded well beyond my employer-match level.

My question is what investment strategies/products should I use to “bridge the gap” of about 15 years between when I retire and when I’m able to draw out of my 401k and Roth IRA? (I’m able to draw the principal out of the IRA at any time, right?)
- Cael

Yes, you can withdraw your contributions from your Roth IRA at any time.. That’s certainly one possibility for bridging that gap.

It’s also important to note that you can begin making “retirement” withdrawals from your Roth IRA at age 59 1/2, assuming you’ve had the IRA for five years or more (which you will have). This shortens the “gap” that you’re trying to cross.

If I were you, I’d probably keep saving along the same path that you’re on without changing much at all. If you do reach a point where you think you can make the leap into retirement before a traditional retirement age, then I’d rely on Roth IRA contributions to bridge that gap.

Q2: Return to work or not?
Here’s our situation: our first child, a girl, was born with a rare bone marrow disease. I did not return to my work as an administrative assistant to take her to her many, many doctor appointments. We decided a year and a half ago to try to have a sibling, through in-vitro fertilization, who is a donor match for our daughter in case she needs a transplant (not a likely scenario for her since she’s stable on drug treatments, but certainly a possibility). Insurance did not cover most of it. I am now pregnant and due in April. The enormous medical bills, even with the help of family, have left us with about $12,000 in debt and monthly payments we can’t quite cover on my husband’s salary. It seems like we’re slipping behind, not cutting down the debt. We still allow ourselves very small luxuries (a Christmas present or two, an occasional evening out, even a two-day vacation this Christmas). Do we cut these out entirely, or should I look for work?? I don’t want to leave a small infant with a nanny but hate paying the interest on all this debt. I think the stress of our debt is making me a less fun parent anyway. There is no guarantee I can find a job in this climate, but at least it would help a little towards dragging us out of this mess we’re in. Or should we just try to get by, paying just the interest, on our debt for a year until I consider my son old enough to be left at daycare (much cheaper than a nanny)?
- Ellen

Unless you get a job that pays quite well, you’ll be losing money on a nanny for your child. You’ll have to make substantially more than you’d be paying a full time nanny to make that work.

Most people in your situation – a situation not too different than the one we were in not that long ago – usually wind up using some form of daycare for their child. Our experience with our daycare was overwhelmingly positive, but I would highly recommend spending plenty of time finding the right one before putting your child in.

One way to do this is to set yourself a “deadline” for when you plan to enroll the child, then start shopping for one now. Many of the good daycares have a waiting list to get in, so you’ll probably want to get on some of those lists.

Q3: Handling an inheritance
When my father passed away last year, we found out that he had name me, not my mother, as the beneficiary to his IRA. I have a choice of small annual payments until retirement (I’m 37) or taking out all the money now and assume the tax hit. I know that he worked hard at building up the value of the account so that, if he should pass, my mother and I could pay off the mortgage on the house we own jointly and live in. We currently owe approximately $96,000 and his account, before I get hit with both federal and state taxes, is $105,000. After taxes, we expect what’s left from my father’s retirement account to be less than what we owe and will still have a couple year’s worth of payments left to go.

The house is a split level with no bathroom on the main floor. My mother is 70, and we expect her not to be able to navigate stairs by the end of the next decade (as it is now she gets winded sometimes due to her asthema). Putting on an main floor addition of a master bedroom suite would make the house more comfortable for her. We’ve gotten some rough quotes, and such an addition would be between $70,000 and $100,000. Also, there are some other repairs and improvements which need to be done on the house. For example the roof will need to be replaced within the next 5 years, and some of the insullation needs to be replaced as well.

Here’s my question(s):
Where should I invest this money my father left us?
Should we follow his wishes and put it all into the mortgage, and have only a few more years of payments, as opposed to over 20 years? (this would delay paying for any major repairs and/or additions for quite some time).
Should we pay to have an addition put on and make the house more comfortable and practical for her in the later years of her retirement, and take the risk that the addition could cost more than the money we have in hand? (and still have over 20 years of mortgage payments)
Or should we use the money to take care of those major repairs, and put any remaining money towards the mortgage?

I’ve asked friends, family and co-workers what they would do and the responses are all across the board, each with seemingly good rational.

What would you do if you were me?
- Jill

If your father wanted you to put it into the mortgage and you’re sure of his wishes, you should follow them.

The question for me really is whether or not that was really the spirit or intent of his wishes. He wanted the money put into the mortgage, but why did he want that? What you should do with that money is fulfill the why part of the question, and that will probably take some soul-searching.

My guess, based on your story here and similar stories I’ve heard, would be that he wanted comfort and security for his wife and thought you were the best person to ensure that. If that’s the case, you should do what will make your mother’s life the best down the road. Adding a room like this will likely increase the value of the home significantly, so when you do eventually sell it, you’ll be able to pay off the mortgage and have some left over.

Q4: Christmas games
In past years, our family has had Christmas at my mom and dad’s house. This year, we made a family decision to have me and my wife start hosting Christmas to take some stress off of my parents.

One of our family’s traditions is to play some board and card games in the afternoon on Christmas day. We usually play Monopoly or Risk or bridge. We have a deck of cards, but no other games. I thought it might be fun to have some different games to play with my family instead of these old classics. I know you play a lot of these games. Any suggestions?
- Randall

One interesting option might be to pick up a copy of Risk Legacy. This takes Risk and adds some interesting twists to it in that you actually customize the game as you play it. For the first fifteen games, everyone who plays it is involved with actually modifying the game through small gameplay changes, the naming of continents, and other such things. It’s really fun – my wife and I are playing this with a group of our friends right now. This would take the classic feel of Risk and add a new twist to it.

There are a handful of really great games that I recommend to almost every family: Ticket to Ride, Carcassonne, and Settlers of Catan immediately come to mind.

Honestly, you might want to also just have copies of the classics, too. Games are really about socializing, and well-played games have a lot of nostalgia to them, which is a wonderful socializing spur. You can often get these classics at thrift stores for a dollar or two, though I suggest buying two copies just so you can be sure you have all of the pieces.

Q5: Money and relationships
You always seem to have similar goals to the ones I aspire to in life. And you seem to have found a perfect soul mate for this. I am French and live abroad, though I aspire to come back soon and start a life there, and a family. I am just over 30 now, and really envy people who found a perfect match at 23, have a mortgage and other financial goals together with a spouse, like fixing up a house or investing towards financial freedom. I sometime feel like when I save money or plan financial things it would be so much easier to be a couple.

I own two properties, and they rent nicely. I do freelance writing for a living but have come to a point where I do not need that income to live. My dream is to find someone like minded and be able to dedicate all this freedom to raising children, I am even considering homeschooling, and other activities that would be a real perk to a man who wants to invest in his career, like fixing up the house, optimizing meals, and so forth, so we could easily live on one income and have a happy family.

I have been on relationships before who lasted anything from a few months to a few years but every time I felt like the financial agreement would fail us and ended the relationship. Any advice on that? I read that every relationship success, whether business, family, friends, or love, was based on a sound economic agreement. Yet I have a hard time when I start dating someone putting the finances on the table to see if we are bound to have a future.

It is taboo over here, or when I say I dream of being a housewife and raising my children they look at me like a 50s wannabe wife or like I want to take advantage of their income to live for free (I am very independent, financially from my parents since I am 17, graduated debt free with grants, have about 200K net worth before turning 30, and able to maintain myself without incurring any debt, pay my credit card and loans in full each month and so on). I have thought about turning to church to find a christian man since those values are important, but not being very religious myself I am afraid we would have disagreements on that topic.

What are your thoughts?
- Susan

I don’t think finances need to be on the table at the start of a relationship. However, when a relationship becomes serious enough that both parties are entertaining thoughts of joining their lives together, then finances should be brought up.

Communication is always the key. If you’ve communicated a lot with this other person and you feel your relationship is strong, bring up how you feel and talk it through. That’s always the best approach in a relationship.

As for looking for someone who would respect you in the housewife role, you’re right that a Christian church might be a good place to start. However, if you’re finding that dating someone of a particular religion is going to bring up other problems, you probably shouldn’t seek someone there. Seek out groups that match your values in some ways, then look for individuals in those groups that match your values in other ways. It’s all about the filtering, and it takes time.

Q6: Housing predicament
My wife and I currently live in condo that we have a mortgage on. We purchased 4 years ago, rate is 5%. We purchased for $140,000 and have about $135,000 remaining on the mortgage. When we purchased the condo we took the $7,500 housing grant that we have to pay back over a 15 year time period or when you sell the house. The stipulation is if you do not make a profit then you don’t have to pay this back. We have already paid back $1,000 of this. The purchase price is adjusted for any improvements or commissions you have paid in the process. We put in more than $10,000 of improvements so if we were to sell for anything over $143,500 we wouldn’t have to pay back any of the remaining grant. We could also choose to rent, which is what I would do if we didn’t take out the grant, but if we were to do this we would have to pay the remaining balance of the grant back at that time since it is no longer our primary residence. This was the $7,500 home buyer credit, not the $8,000 that you don’t have to repay and can rent after 3 years.

So our current situation, my wife and I are both 27 have no debt (no credit card, no student loans) besides our mortgage and 2 car loans. Car 1 – 1 year remaining $250/month, Car 2 – 2 year remaining $350/month. We make a combined $115,000/year. We currently put about $1,000 a month in retirement (+ company match) and have a combined $40,000 currently saved in our retirement. We also have $10,000 in our savings for a future down payment on our house. We are expecting our first baby in February and at that time my wife will take off 12 weeks of work, she will get 50% pay during this time. I am going to lower my retirement to just the company match during this time period to make sure we have enough money, although I think we should be fine and and will increase the retirement once she goes back to work. We will be incurring day-care costs once she goes back to work of roughly $800 per month.

Here is our delimna. We have our condo currently listed at $144,000 however we may only be able to get $135K or even less for it, which after commissions would barely break even on our mortgage and could possibly even take a little loss. We want to continue to save and build our savings account up to around $15K before we buy our new place. For us to do this we can’t really afford to lose that much when we go sell. The condo we are living at will probably be too small once the baby gets to about a year old so we are looking at houses in our area at around $200-$250K, (I realize we wouldn’t have 20% down but this is what we are wanting for now). We also want to take advantage of the lower interest rates that are currently in affect right now (I personally believe they will be low until 2013).

Looking back I now realize we should have probably just rented 4 years ago but hindsight is 20/20. Anyway, I guess our options are stay in the condo until we can get a buyer that is willing to give us a decent offer, take a loss on our condo and not have as much to put in a downpayment, or pay out the remaining grant and rent out the condo ourselves until the market turns around in our area (this would also lower our down payment).

It is frustrating because I feel like we are responsible with our money and didn’t necessarily do anything incorrect yet we may end up losing money on this decision to buy our first place, however I realize this is just the times we are living in and going forward I will think more indepth of our decisions. Any advice would be greatly appreciated.
- Jim

You didn’t do anything incorrectly other than not prophetically predict what the housing market was going to do. You made a move based on the information you had at the time and you’re largely responsible with your money. Don’t be frustrated with yourself.

If I were in your shoes, I would stay put for the time being and make it work with the child for as long as you possibly can. Sarah and I shared a very tiny apartment with our first child until he was almost 2 and our second was on the verge of arriving. If it weren’t for that second child, we might still be living there.

This will allow you to not only save for the down payment for the house you want to buy, but will also allow you to get more and more above water on your condo. Even if you don’t time the market perfectly, if it begins to rebound, your condo will also go up in value, meaning the rebound won’t hurt you as badly as you might think.

Q7: Pie options
Is it less expensive to make your own pies or to buy them from a good baker? I don’t like to buy some of the cheaper pies because they taste artificial but there are several bakeries around here that make good pies.
- Linda

Sarah and I have made quite a few pies over the years. My experience has been that a truly great homemade pie takes about two hours of work and uses between $10 and $15 in ingredients, assuming you have very little of the ingredients on hand. A simpler homemade pie – one with a pre-made crust – can be done in much less time, but isn’t quite as good.

So, how does that compare to pies that you might purchase? There’s a bakery here that sells pies that are roughly as good as the pies we can make with a pre-made crust for about $15. There’s one bakery that supposedly sells mind-blowing pies (though I’ve never tried them) for about $20.

You’ll save money by making it yourself, but not enough to make it worth the time unless you really enjoy the process of making pies. I actually do if I’m in the right mood.

Q8: 40/30/30 question
I have a question about the 40/30/30 rule you spoke of in November of last year. You say it basically means you should spend 40% of your income on basic bills, 30% on saving for the future and 30% on enjoying life. But how do you do the math? For instance, if I save $16,500 through my 401(k) at work, that’s money that I never see in my bank account, but it is money that’s going towards saving for the future. So do I just take my net bi-weekly pay, annualize it, add $16.5k to the total, divide by 12 months and then use the 40/30/30 formula on that number to figure out my monthly ‘budget’?
- Regina

That’s what I would suggest doing. I would simply ignore taxes entirely. If I used pre-tax money for savings, I’d just count that normally.

It’s important to remember with things like 40/30/30 that they’re just guidelines to get you moving in a healthy direction. They’re not absolute rules that work perfectly in all possible situations. Almost all personal finance advice is just like that – everyone’s specific situation is different.

If you’re putting $16,500 into your 401(k), you’re probably doing really well with your finances. Keep it up.

Q9: Wanting frugal gifts
I was just wondering if you could give some advice, it’s only a small problem, barely a problem really but I thought you might have an idea that I haven’t thought of. With Christmas coming up presents have been a topic of conversation here and there. My mum has always bought one or two big things for me for Christmas and then a few little stocking fillers (I’m an only child so she always goes a little overboard). The stocking fillers always used to be useful things, socks, underwear, occasionally toiletries. I always loved this, I went through a stage of about four years where I didn’t have to buy my own underwear because I always got new ones at Christmas!

Of late though she’s been buying more trinket type things that don’t have any use. It’s not that I mind her buying things like that, it’s more that I feel bad that she’s spending money on something that is just going to get (eventually) thrown out because I have no use for them. I think she’s doing this because I’ve become more frugal over the past few years and she thinks I’m depriving myself, when the truth is I just laugh at the prices they put on things that have (in my mind) no value. Any ideas on how I could suggest to her that I much prefer the socks and undies route? I’ve tried commenting how awesome it was when she was doing the socks and underwear thing but that didn’t work.

As I said, it’s not a huge problem, it’s not that I mind that much getting those sort of things, I know that the thought is there, it’s more that I feel bad that she’s essentially wasting her money.
- Lauren

I think the key is communication, but I wouldn’t do it right in the face of the Christmas season.

Accept whatever you get this year, then have a conversation about this in April or in June or in September. Sit down with your mon and simply say that you actually do not want a lot of those “trinket”-type things. Reinforce it by simply not commenting on or even gently deriding the materialistic things you don’t value outside of the context of gift-giving.

The key is to make sure that you’re not bashing your mother’s gifts. The purpose of this isn’t to hurt her feelings but to make sure she understands what you actually value. Tell her what you value and make it clear to her through your actions.

Q10: Sleep remedies
You almost always seem to have great frugal ideas for life’s problems. My big challenge as of late is insomnia. I often can’t get to sleep until one or two in the morning and when I have to get up at six, I’m exhausted. Do you ever get like this and if you do, how do you deal with it?
- Evan

Whenever I’m having a hard time sleeping, I do two things.

First, I exercise a lot in the morning. Not in the afternoon or evening. The morning. I do something around the house that requires a lot of exertion or I’ll go on a brisk walk or jog for a long while or I’ll go on a bike ride. The key is to really wear myself out in the morning so the endorphins and other responses wear off before bedtime, leaving me with physical exhaustion.

My other tactic is my old standby of warm milk with nutmeg. I just take some milk, heat it until it’s warm (bordering on hot), and sprinkle several dashes of nutmeg on top. This puts me to sleep really well, for some reason.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

Every Sunday, The Simple Dollar reviews a personal finance or other book of interest. Also available is a complete list of the hundreds of book reviews that have appeared on The Simple Dollar over the years.

I was about to review the third edition of Liz Pulliam Weston’s Your Credit Score several months ago when I found out that a fourth edition was forthcoming, so I waited until this new and updated edition was released to write this review. What I found was that the book remained a detailed and useful resource concerning how credit scores work in America.

Part of the challenge of credit scores is that the exact formulas for calculating them remain trade secrets. At best, companies like Fair Isaac issue guidelines on how to improve your credit score, but they don’t tell you exactly how they’re calculated.

Unsurprisingly, this can result in some serious confusion. Even worse, these scores are used for all kinds of things, from determining how trustworthy you are during a job interview process to determining your rates when you buy insurance.

Weston has written a pretty solid concise guide to understanding and navigating this minefield.

Why Your Credit Score Matters
If your credit score is good, banks will want to do business with you. They’ll provide you good rates on things like mortgages and car loans. If your credit score is bad, banks will pretty much avoid you because, to them, you’re not worth the risk. Even if you don’t really care about such things, it’s important to keep tabs on your credit score because it’s often the first way you find out that your identity has been stolen. People open up lines of credit in your name, use them for purchases, and you’re the one holding the bill – not something you want to have happen to you.

How Credit Scoring Works
Your credit score is calculated based on your credit report, which is a compiled document about you listing all of the sources of credit you have, such as student loans, credit cards, car loans, mortgages, and so on. You can get your credit report from the federal government at annualcreditreport.com. Generally, five factors make up your credit score: your payment history (have you been making payments?), how much you owe (do you owe a lot?), how long you’ve had credit (longer is better), your last application for credit, and how many different types of credit you use, and all of these pieces are obtained from your credit report.

FICO vs. “FAKO” – Competitors to the Leading Score
The primary formula used for calculating a credit score is called FICO (short for Fair-Isaac Corporation) and it’s the general formula that’s used for calculating your credit score. Unfortunately, the FICO formula is a trade secret, meaning we don’t know exactly how it works. Some companies offer alternatives to FICO, but none of them have caught on.

Improving Your Score the Right Way
How do you improve your credit score? First, get your credit report, as mentioned above, and then make sure you know what every entry on that report is and that it’s correct. Next, make sure to pay all of your bills on time, and then pay down your debts. Also, if you’re trying to improve your score and you’re carrying any debt at all, it’s probably not a good idea to close any of your credit cards or lines of credit.

Credit Scoring Myths
The biggest myth that goes around about credit scores is that your score will be helped by closing old credit cards or having your credit limits reduced. This actually can hurt your score if you’re carrying any debt because it alters the “how much you owe” element of your credit score, which is based on a comparison of your actual debt versus your credit limit. The closer you are to your credit limits on the whole, the worse off you are. So, if you have a $2,000 debt on a card with a $2,500 limit and another card with $0 debt with a $2,500 limit, you’re utilizing 40% of your credit limit. Not bad. But if you cancel that $0 debt card, you’re suddenly using 80% of your credit limit – not good.

Coping with a Credit Crisis
Many people tend to retreat into their shell when things get financially bad, but that usually just makes things worse. A much better approach is to handle it head-on. Look for ways to free up some cash by selling off things in your closet. Prioritize your payments so that you’re not going to lose your home or your car. Contact some of your lenders and discuss the crisis you’re going through – some lenders will put your debts into forbearance during a job loss or other such situations. Weston discusses credit counseling (and doesn’t give it much of a thumbs-up) and bankruptcy as final options after you’ve tried everything else.

Rebuilding Your Score after a Credit Disaster
Much like dealing with a bad situation, recovering from it also requires you to be proactive. Check your credit report regularly and make sure it’s correct with regards to your current situation. Resolve the bad spots still left on your report. Also, if you have the opportunity, make sure that you get positive things about yourself added to your report. If you have a line of credit that’s not being reported that’s in good shape, try to get that to appear on your report by contacting the company who is offering that line of credit.

Emergency! Fixing Your Credit Score Fast
It’s difficult to get changes made immediately to your report and your score. If you do try this route, you need proof of what you’re saying or else you’re just wasting both your time and their time. A much more reliable route is to focus on the positive change you can make over a month or two by doing things such as paying off as much of your credit cards as possible (improving your ratio, as described above), using your credit cards very lightly, and trying to get positive things added to your credit report.

Insurance and Your Credit Score
Insurance companies use your credit score as an element of determining how much to charge you for insurance, so one of the best things you can do to improve your insurance rates is to improve your credit score. Of course, that’s not the only factor in determining your insurance rates, as things like your deductible amount also influence how much you pay.

Can Bad Credit Cost You a Job?
Employers often use credit scores to help winnow down applicants for an open position, particularly in a poor job market. If an open position has a deluge of reasonably qualified applicants, employers are going to look for reliable and trustworthy people, and like it or not, credit scores are often used as a quick thumbnail to check how reliable and trustworthy people are.

Keeping Your Score Healthy
Pay your bills. Pay down your debts. Have an emergency fund. Have adequate insurance (for example, life insurance for you and your spouse). These things all go a long way toward ensuring that your credit score is healthy for the long haul.

Is Your Credit Score Worth Reading?
Weston’s book focuses in on credit scores like a laser beam. If you ever had any interest in understanding how credit scores work and how they affect your life in more detail, this is absolutely the book to pick up.

Keep in mind, though, that this book hits a home run with the topic at hand, but doesn’t really address much else in terms of personal finance (outside of issues directly connected to the topic), so if you’re looking for more of a full picture, you might want to pick up a different book and look at this one as a supplement.

Check out additional reviews and notes of Your Credit Score on Amazon.com.

Edit: I made a mistake with the standard deduction math and explanation near the end of the original version of this post. I have since corrected it. Thanks to the readers who pointed it out.

Monica writes in:

Last year, I took the advice of my older brother and made several charitable donations during December to help out my taxes for the year. When I filed them, I did get a return, but it wasn’t nearly as big as I expected. Are charitable donations really a big deal or did I do something wrong?

Charitable donations do provide a reduction in your taxes, but it’s not the huge reduction that many people often think they are or expect that they are.

To understand the benefit that charitable donations give to your taxes, first you have to understand how income taxes work. This is something that many people surprisingly misunderstand.

When you earn ordinary income from working at a job, you have to pay income taxes on it. We all know that, of course. What many people don’t quite understand is how the amount you pay is calculated.

Let’s say you are a single person earning $50,000 this year (we’re not going to worry about issues like personal exemptions and other tax issues that would further complicate the issue – we’ll just look at $50,000 in taxable income after such things). To figure out how much taxes you have to pay, you have to look at the income tax rate table. For 2011, it looks like this for single people (there’s a different table for married couples):

For income between $0 and $8,500, you pay 10% in taxes.
For income between $8,500 and $34,500, you pay 15% in taxes.
For income between $34,500 and $83,600, you pay 25% in taxes.
For income between $83,600 and $174,400, you pay 28% in taxes.
For income between $174,400 and $379,150, you pay 33% in taxes.
For income over $379,150, you pay 35% in taxes.

So, as I mentioned, we’re looking at a single person who makes $50,000 a year.

For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($15,500), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $3,875 for this bracket (25% of $15,500).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $8,625. This person will owe $8,625 on their taxes this year.

Now, how can a person lower that amount? The most common way is through deductions. The government gives out standard deductions each year on a person’s taxes. For 2011, that amount is $5,800 for a single person. How that works is that you simply subtract that deduction from the total amount of income the person earned for the year. So, this person’s income for tax purposes is actually $44,200.

So, let’s look at this person’s actual taxes after their standard deduction.

For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($9,700), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $2,425 for this bracket (25% of $9,700).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $7,175. This person will owe $7,175 on their taxes this year.

So, that person’s standard deduction on their taxes actually saved him $1,450. The standard deduction may be $5,800, but it only saved the guy $1,450 because the deduction just reduces his total income for the year in terms of taxes.

Charitable giving works exactly the same way. Every dollar you donate to a registered charity becomes a deduction on your taxes, just like a standard deduction.

Let’s say the person above donates $5,000 to his church (a 10% tithe) and $2,000 to Doctors Without Borders and another $2,000 to L’arche Tahoma Hope. That’s a total of $9,000 in charitable donations.

So, this person makes $50,000 a year. From that, he can either subtract his standard deduction ($5,800) or he can subtract his charitable donations ($9,000). This means that his taxable income – the amount he pays on his federal income taxes – would likely be $41,000. Let’s look at his taxes now.

For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($3,700), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $1,625 for this bracket (25% of $6,500).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $6,375. This person will owe $6,375 on their taxes this year.

In other words, this person’s $9,000 charitable contribution saved them $2,250 on their taxes. That’s because the person was in the 25% tax bracket before the donation and in the 25% tax bracket after the donation, which means that they essentially saved 25% of their donation on their taxes. (Sometimes, a donation will drop you to a lower tax bracket, which is fine.)

However (and this is where the readers pointed out my mistake in the original version of this post), the standard deduction would save the person $1,450. The actual savings – compared to the standard deduction – for this charitable giving is $800. Charitable giving works best as a tax deduction if it’s coupled with other deductions, such as home mortgage interest.

So, charitable donations are a great thing and they do offer some tax savings, but you don’t save $1 for every dollar you donate. Instead, you often reduce your tax bill roughly a quarter or so for every dollar you donate. That’s still a great little bonus.

Hopefully that clears things up for you!

One of the most empowering things I do on a regular basis is to create a detailed sketch of what I want my life to be like in five years or so, and then I repeat this exercise with periods further down the road (ten years and twenty years and then when I’m about 70). I usually do this in detail every few months or so.

I try to create optimistic (but not unrealistically optimistic) pictures of the future. I don’t paint pictures of myself as a rich person or as some sort of perfect citizen. Instead, I focus on where I’d actually like things to be based on where things are now and where they’re heading.

A five year picture, for example, sees three intellectually curious and healthy children. It sees me having written a handful of novels. It sees us living in a more rural area than we live right now. It sees me in a bit better physical shape.

That picture is filled with a lot of details, and it’s in those details that I see what’s actually really important to me. This is the life that I want to lead.

Yet, what I notice when I paint these pictures of the future is that they involve very few things that actually involve spending money.

Intellectually curious and healthy children are in large part a result of invested time, as are the novels and the improved fitness. Moving into the country probably won’t cost us much money on the whole.

Simply put, the things I want out of my life don’t involve spending money. The things I genuinely label as important in my life moving forward aren’t related to spending money.

What they do involve, however, is time (and energy). Time is really the magic ingredient in making these things happen. My children need time. My spouse needs time. My health needs time.

The more money I spend, the more time I have to spend working. I have to have the income to cover what I’m spending, so if I’m spending a lot, I’m going to be spending more and more of my time earning money.

The more time and energy I spend working, the less time and energy I have to spend making that picture come true. The elements of the life I want are realistic and achievable, but only if I have time and energy to devote to them.

So, how do I minimize the time and energy I devote to work? The answer is simple: frugality.

If I simply don’t spend my money on unimportant things, I can afford to take on less demanding work that gives me more space to work on my other life goals. I don’t have that pressurized job at the office – in fact, I left that in 2008.

Spend some time thinking about what your goals are. Create that detailed picture of what you want your life to look like in five years. Ask yourself what you really need to achieve those goals. I’m willing to bet that time and energy are more vital ingredients than money is.

Then, each time you consider spending money on something important, ask yourself if it’s holding you in a place where you don’t have time or energy to pursue your goals in life.

Money isn’t everything.

Each week, I highlight ten things each week that inspired me to greater financial, personal, and professional success. Hopefully, they will inspire you as well.

1. Sounds of the Winter by Walt Whitman
I love to get all bundled up and go on a walk in the winter.

Sounds of the winter too,
Sunshine upon the mountains–many a distant strain
From cheery railroad train–from nearer field, barn, house,
The whispering air–even the mute crops, garner’d apples, corn,
Children’s and women’s tones–rhythm of many a farmer and of flail,
An old man’s garrulous lips among the rest, Think not we give out yet,
Forth from these snowy hairs we keep up yet the lilt.

The world looks and sounds like a different place in the December season.

2. Vincent van Gogh’s View of Arles (1889)
Good impressionism makes me want to go to the place depicted in the painting and see it through my own eyes, to get my own impression of the place.

I am going to have to visit Arles someday. Thanks to Oliver Kurmis for the image.

3. John Quincy Adams on leadership
What exactly makes a leader? I don’t really think it’s just the person who starts the ball rolling in a movement.

“If your actions inspire others to dream more, learn more, do more and become more, you are a leader.” – John Quincy Adams

Lots of people out there are leaders.

4. Stefon Harris on mistakes
This is a really interesting way to think of mistakes, as merely a part of the song we’re always playing.

Mistakes are a part of the tapestry of life.

5. Charles Caleb Colton on what money won’t buy
I find the things that money cannot buy to be much more valuable than the things money can buy. Time, for instance.

“To cure us of our immoderate love of gain, we should seriously consider how many goods there are that money will not purchase, and these the best; and how many evils there are that money will not remedy, and these the worst.” – Charles Caleb Colton

My children won’t be young forever.

6. Leadership Lessons from Dancing Guy
If you want to get a movement started, a leader is useful, but it’s often the first follower that makes the difference.

This video does a great job of visually illustrating this point.

7. Mary Cassatt’s Mother Combing Her Child’s Hair (1896)
I absolutely love Mary Cassatt’s paintings of moments of parenthood.

I have a four year old daughter. Almost every weekday morning, she winds up sitting on my lap while I brush her hair for the day. Thanks to Cea for the image.

8. Sam Keen on love
If you’re looking for perfection, you won’t find it.

“You come to love not by finding the perfect person, but by learning to see an imperfect person perfectly.” – Sam Keen

I love Sarah because she’s imperfect. Perfection would be dull. Her quirks make her amazing.

9. Rogers Hornsby on baseball and winter
I know the feeling.

“People ask me what I do in winter when there’s no baseball. I’ll tell you what I do. I stare out the window and wait for spring.” – Rogers Hornsby

I can’t wait to start listening to daytime baseball games again. They just make the day flow so much better.

10. Mr. Jones by Counting Crows
I spent most of 1993 and 1994 singing this song to myself. I spent some time trying to learn guitar (and overcome my large hands) to try to play this song.

This is pure nostalgia for me. Hearing this song takes me back to a particular place and time, almost as if by magic.

I find it very easy to buy stuff online without adequate thought. I’ll click a few times and suddenly the item I want is on the way.

I particularly struggle with three sites directly connected to three of my biggest hobbies: Amazon (for books), Cool Stuff Inc. (for board games), and Steam (for computer games – and, yes, Steam sales are particularly my weak spot).

Over the years, I’ve had to build up some defenses against these temptations. I’ve tried lots of different things, but I’ve found that only three of them really work and make a difference in my buying habits.

Delete Passwords and Credit Card Info
Whenever I place an order at one of these sites, one of the first things I do is make sure that my credit card information is not stored at that site. When my browser prompts me to save the password for the site, I always say “no.”

For some people, this might seem like an annoyance. It’s supposed to be. The reason for doing this is to force me to slow down when I’m tempted to make an unnecessary purchase.

Let’s say, for example, that I’ve been reading reviews of some board game and I’ve talked myself into spending some of my extra money on a copy of that game. If I left my password saved and my billing information stored in the online retailer’s site, then I can have that game shipped to my house after a simple search and about six clicks.

On the other hand, if I’ve deleted my password and my billing and shipping information, I have to spend the time to type in my username and password, type in my card number and other information, and type in my billing address and shipping address. This adds up to several minutes of additional typing.

During that time, my mind on some level is rethinking the purchase. “Is it really worth it?” I’ll ask myself. Quite often, I’ll wind up never placing the order at all. This keeps money in my pocket instead of watching it leave for something frivolous.

Keep a “Already Have This” List Nearby
On my computer screen, I have three Post-It notes.

One says “Books to Read:” and lists about five books that I already have on my shelves.

Another says “Games to Play:” and lists about five board games that I already have on my shelves.

The third says “Computer Games to Play:” and lists about five computer games that I’d love to dig into more.

Whenever I’m tempted to buy another one of these items, I just glance at these notes and I realize that I already have more than enough.

Use the Computer Less
My final tactic is to simply use the computer – particularly the internet – less and interact with the real world more. Instead of surfing the web during my idle time, why not read one of those books on my “Books to Read” list or play a board game with my wife? Instead of playing a computer game, why not just go for a nice walk?

The computer is a wonderful source for entertainment, information, and contact, but in the end, those things are just a stepping stone for interacting with the world around you.

Keep these tactics in mind if you find yourself regularly tempted by online shopping. They guide me to better results; hopefully, you’ll find the same.

In 2002, I started a blog about dreams and dream science. It eventually failed.

In 2004, I started a blog about sports. It eventually failed.

In 2005, I started a blog about parenting. It eventually failed.

In 2006, I started a blog about personal finance. It succeeded, largely on the lessons learned from the failures.

* * *

Let’s start again.

In 1996, I started dating a girl that seemed interesting to me. It eventually failed.

In early 1997, I started dating a girl that seemed interesting to me. It eventually failed.

Later in 1997, I started dating Sarah. She eventually became my wife.

* * *

Are we seeing a theme yet?

In 1996, I went to college majoring in English. I failed and changed majors.

In 1997, I started majoring in mathematics. I failed and changed majors (though I came close to a minor in this subject).

Later in 1997, I started majoring in the life sciences. I largely felt this was a failure, too, though I did wind up eventually accumulating enough credits for a degree.

In 1999, I started majoring in computer science. I ended up graduating with this as my primary major.

* * *

Let’s try this one more time.

In 1994, I wrote a novel. When I was finished with it, I realized it was trash.

In 1997, I wrote another novel. When I was finished with it, I realized it was trash.

In 2002, I wrote another novel. I tried to get this one published. I accumulated a giant pile of rejection letters and one vague nibble. I eventually decided this novel was trash, too.

In 2005, I wrote another novel. When I was finished with it, I realized it was trash.

In 2008 and 2010, I was able to get personal finance books published.

In 2012, I’m going to give a novel another shot, from a platform of success in a similar area and a history of failure in fiction.

* * *

What do each of these stories have in common? They involve failure. Lots of failure. They involve mistakes, mis-steps, stupid moves, and mediocrity.

Yet, through repeatedly failing, I learned some things. I learned what pieces were bringing on failure as well as what pieces I was doing right.

Every time I’ve failed (at least in adulthood), I’ve tried to figure out why I’ve failed. What things did I do wrong? What things did I not account for?

One thing I did not do is blame others for my failure. That’s an incredibly easy trap to fall into because it lets you off the hook from admitting you did anything wrong. Whenever you fail, you always did something wrong. If nothing else, you relied on someone else too much, someone who let you down!

Often, when you figure out what you did wrong, you have an exact recipe for improving yourself. The mistake you made tells you what you need to do to get it right the next time.

Every single one of us has failed at something – and is going to fail at something. We’re going to overspend. We’re going to make a career mis-step. We’re going to write a novel and have no one ever want to buy it. We’re going to destroy a friendship over something silly.

The question is whether or not we’re going to learn anything from that failure.

Over the past few days, I entered into an agreement to join forces with Cut Media to ensure the long-term future of The Simple Dollar.

What Does This Mean For Readers?
To me, this is the most important question to be asked about this arrangement.

I have signed a long-term agreement with Cut Media with regards to this site. For at minimum the next three years, I will continue writing posts pretty much exactly as I always have. They will appear twice daily (except for holidays), just like they have for the past few years. In terms of content, virtually nothing will change.

Over the next few months, there will be some secondary changes. At some point in the near future, the site will be moved to a different server, which may cause a bit of downtime and might cause a short-term delay in posting. After that, there will likely be a moderate redesign of the website. Aside from that, things should continue pretty much as they always have.

Why Make This Move?
Simply put, at this point, The Simple Dollar is too big for one person to run. There are too many different things going on that need my attention at the same time.

Most people, when they see the site, think first and foremost about the content. That obviously takes time, of course.

What you don’t see is the other things that eat an incredible amount of time and focus.

I read mountains of reader emails.
I deal with thousands of comments.
I have to keep the software that runs The Simple Dollar updated.
I have to regularly tweak the site design, often in really subtle ways.
I have to negotiate and communicate with advertisers.
I have to make sure that the site is up and running and figure out how to fix it when it’s not – and this often requires me to watch The Simple Dollar when I’m on vacation with my family or enjoying a holiday with them.
I’ve also attempted to hire and train assistants to help with this stuff – but none of them have ever worked out and some have actually caused additional problems.

The part about The Simple Dollar I enjoy the most is the writing. I also enjoy contact with readers. Everything else is simply time-consuming gruntwork that I don’t enjoy that takes away time from my family and from things I’d rather be doing (like working on other writing endeavors, such as my long-lamented fantasy novel).

Something had to give, and the end result was my arrangement with Cut Media. They have a large team in place to handle these things.

They will be taking care of the comments, the software that runs The Simple Dollar, the site design, the advertising arrangements, the site’s server(s), and making sure the site is up and running.

Essentially, I’m left with just the pieces that I really enjoy – and I’m being compensated for letting them take on the stuff I don’t want to do.

This is going to be the first Christmas in many years where I’m not stopping several times a day to make sure the site is up. That is an unbelievable relief to me.

What’s Next?
Aside from continuing to write for The Simple Dollar, I’m planning on focusing in 2012 on other projects, which I’ll talk about closer to the new year.