When it comes time to do your taxes, it is always beneficial to take as many tax deductions as you possibly can.  If you can legally make the deduction, it won’t be considered cheating on your taxes.  You just want to be sure that you are paying the least possible amount on your taxes.  Sometimes people miss deductions they have available and end up paying more taxes than they should.  That is never fun.

When figuring out your gross income, you have to include basically any money that comes in to you.  This includes your ordinary wages, extra income, interest, dividends, etc.  The only money coming in to you that is not included is cash that you get in the form of a loan.  If someone lends you ten thousand dollars, you don’t report that as income.  If someone owes you ten grand and pays you back in full without interest, you don’t have to include any of that income in your taxes.  However, if you have ten grand in your savings account and you accrue five hundred bucks worth of interest in the year, you do have to include that in your taxes.

Now what sort of interest payments can you deduct and use to offset your total tax bill?  Well the only sort of of interest a regular working individual may deduct is the interest on their home loan.  Your mortgage interest is deductible up to a million dollars worth of principle.  So for example, say that your mortgage is 500k and you end up paying 30k worth of interest in a given year.  You may deduct that 30k against your income.  However, if your mortgage balance is 2 Million and you end up paying 120k worth of interest that year, only half of it is deductible.  Also, it is only the interest portion of your payments that are deductible.  You are typically paying back some of the principle with each payment, and that part is not deductible.

So what other types of interest are deductible for an individual?  Well, pretty much none.  You can’t deduct the interest on your car loan, the interest on your credit cards or the interest you are paying on that loan for your new big screen TV.  However, if you owned a business and your business took out a loan to buy a car, your business could deduct the interest on that car loan against the profits for that year.

So what is the morale of the story?  Your home loan is probably the best debt you can have.  If you get the opportunity to roll your credit card debt, car loan, etc. into your home mortgage, do it!  Not only are you going to get a lower interest rate, but you are also going to be able to deduct the interest payments from your ordinary income!

A lot of the time, we are given a couple variables and we want to calculate the payments on a loan.  For example, you are trying to finance a $10,000 car at a 12% interest rate for 5 years.  All you want to find out is how much your monthly payment is going to be and whether or not you can afford that payment.  Just a heads up - you will need a calculator to figure out these payments.  Since you are probably on a computer right now, you can use the calculator on your computer, or you can use excel.

Lets use the example above and try to calculate out your monthly payment.  First, lets set some terms.  PV (Present Value) of the loan is going to be $10,000.  Your interest rate per year is going to be .12.  However, since we are trying to calculate out MONTHLY payments, we are going to want to turn this 12% per year into a monthly rate.  This is as simple as dividing .12 by 12 which gives you .01 or 1%.  Finally, we are going to want to define our number of payments, n.  We know that it will be 5 years, but we need to convert that into months.  Simple as multiplying 5 by 12 which gives you 60 months.

Ok, so here are our variables:

Total number of payments: n=60

Interest: i=0.01

Present Value: pv=10000

The easiest way to calculate payments is to use a spreadsheet on your computer like excel.  Open up the program, select a cell and type in the following exactly (without the quotes): “=PMT(0.01,60,10000)”.  Hit enter.  This will automatically calculate out your monthly payment of “-$222.44″.  This is what your monthly payment on your car loan should be, given those exact variables.  I am sure that the loan you are trying to calculate payments on has different variables, so here is the equation using variables instead of values: “=PMT(i,n,pv)”.  To calculate payments on your loan, just replace the i with interest, n with number of payments and pv with the total loan amount.

Using excel to figure this out is by far the easiest way.  Just plug your variables in and hit enter and you are finished.  If you are deathly afraid of excel, you can use the old-fashioned formula.  Take a look at it and maybe you might want to give excel a shot first:

Monthly Payment = (pv) * (i/(1-(1+i)^(-n)))

Ok, lets solve this using our example:

Monthly Payment = (10000) * (.01/(1-(1.01)^(-60)))

Monthly Payment = (10000) * (.01/(1-0.55045))

Monthly Payment = (10000) * (.01/.44955)

Monthly Payment = (10000) * (0.022244)

Monthly Payment = $222.44

So we get the same answer of your monthly payment being $222.44.  Piece of cake!

What do we learn from this?  You are buying a car for $10k and you only have to make monthly payments of $222.44 for five years to pay the thing off.  Doesn’t sound that unreasonable?  Well if we add up all the monthly payments, we find that you ended up paying a total of $13,346 for a $10,000 car.  And what is your car worth now?  $3,000?  So by the time you pay the car off, you are out a total of over ten grand!

What would have happened if the financing option had not been available to you?  You might have bought something a little more economical, say a car worth $2500.  Even if your car is now worth $500 now, you are still only out two grand instead of being out over ten grand!

Keep this in mind next time you calculate payments on your loan!

If you have a high-deductible health insurance plan, you should be eligible for a tax deductible health savings account.  What this means is that you can set up a savings account (yes, you get paid interest) to deposit money into each year.  Since I am single, I can deposit up to $2,800 per year before tax.  (If you have a family, I believe this limit is raised to $5,600 per year).  This means that I can put $2,800 into my health savings account and write that off.  I don’t even need to itemize for that year if I want to take the deduction.  The money sits in the account and earns interest tax-free until you need to use it for related medical expenses.

Here is an example of how this works.  I start my high deductible health insurance and tax deductible health savings account on January first, 2008.  I start the year off by depositing the maximum $2800 into the account.  Throughout the year, I end up incurring $2000 worth of medical expenses which I use my tax deductible health savings account to pay for.  At the end of the year, I have $850 left in the account (I made a few extra bucks because of the interest).  When it comes time to file my taxes, let’s pretend I made $30,000 in wages that year.  Well, since I made that $2800 contribution to my tax deductible health savings account, the government is only going to tax me on $27,200 rather than the full $30,000.

Ok, so I saved a bunch of money on my 2008 taxes, and I have also made a few bucks in interest for my tax deductible health savings account along the way.  Now it is January 1st, 2009, and I still have this $850 left in my account.  Any remaining balance rolls over.  This is just like a regular savings account; its not like a “Flexible Health Spending Account” where the unused balance at the end of the year is lost.  So I have this $850 still in my account on January 1.  So I decide that I want to make the maximum tax-deductible contribution again, and put another $2800 into the account.  Again, I get to write that $2800 off when I do my taxes, and now I have a whole $3650 in my Health Savings account that is just sitting around earning interest.

Remember that you don’t have to choose to throw in a whole $2800 all at once.  You can make as many deposits as you want into your account.  At the end of the year you total them all up, and you can write off the sum of them as long as it is not over the legal limit (for 2008, the limit is $2800 for single people and $5600 for families).

You can use the money in your tax deductible health savings account for a wide range of health purchases.  Not only can you use it to cover any medical bills that are not covered by your insurance (your deductible), you can use it to buy over-the-counter medicine, even diapers!

If you don’t have medical insurance, start looking online for something today.  My plan is only $50 a month and has already saved me well over ten thousand dollars in medical bills, not to mention having the tax benefits of the tax deductible health savings account.

I can’t stress this point enough.  This is really how people end up in debt.  They never intend to end up overwhelmed with debt; it just happens.  It is very easy to get suckered into purchasing something that you cannot afford when the monthly installments seem so manageable.

What if you could finance a meal?  You want to get a good sandwich for lunch, but you only have 5 bucks.  You don’t want a subway footlong, you want that fancy deli sandwich thats ten bucks.  What if the deli said “Ok, you can get our fancy sandwich for nothing down, but 19 cents per month for the next five years.  That doesn’t sound like a bad deal at all.  So you end up paying $11.80 over 5 years for a $10 sandwich.  It seems like you are only paying an extra buck-eighty to get that sandwich upgrade.

Wrong!  Had you not had the financing option available in the first place, you would have had to settle for the $5 footlong, thus the fancy sandwich is costing you $6.80 more.  So not only are you getting dinged with the financing premium, you are buying more expensive stuff than you can afford!

Most people can see extra they are paying for the financing, but they don’t realize it is the fact that they are buying stuff that they can’t afford.  They scapegoat the super high interest rates and blame the credit card companies when they themselves are to blame for their dangerous spending.

So if you are in debt, the best way to get out of debt is to stop spending more than you can afford!  Change your spending habbits - delayed gratification - and your finances will fall right into place.

If you are an employee, you are in luck.  There are a ton of laws governing how you are treated that will really work to your advantage.  Look up the laws that govern your area; local laws can be different from place to place.  For example, the federal minimum wage is around $7/hour, the California minimum wage is around $8/hour San Francisco minimum wage is over $9/hour.

1.  Your employer MUST pay you for the hours worked.  They are very strict about this.  If your company goes under, the employees are typically the ones to get the first stab at what is left.

2.  Your employer must inform you of any pay cuts before you work those hours.  You cant be making $15/hour, but then all of the sudden get paid for $13/hour.  Its just plain illegal.

3.  Know your break rights.  From what I remember, you must take a 30 minute break for every 6 hours worked, and you have the legal right to take a 30 minute break if you work a 5 hour shift.  I remember an old college job where we were forced to waive our rights to the break.  I didn’t mind since it meant more clock time, but I am sure it was still somewhat illegal.

4.  You can never be forced to do something illegal or unsafe.  If you get fired for refusing to do something like that, your employer can get in HUGE trouble.

5.  Harrassment and sexual harrasment laws are extremly strict.  You would be shocked at how easy it is to label things as harassment.

If you think you are treated unfairly at your job, research labor laws online, or talk to an attorney.  The government has taken a lot of steps to prevent a lassie-fare sort of economic system.  Legislation in this department is very strict to help look out for the little guy.

Here is a list of a few things to avoid if you are trying to save up some money:

1. Do not get a DUI.  It will end up costing you thousands at the very best.  It will also cost you your license, and even worse, could cost peoples’ lives.
2. Drop Starbucks.  Get a coffee machine and brew your own cup of joe.  If you like the fancy drinks, buy an espresso machine and be your own barista.
3. Don’t blow your wallet at the bars.  You can easily rack up a few hundred in a night of drinking.  By being a little thrifty, that same night can cost you under twenty bucks.
4. Don’t leave the lights on.  Turn your computer, lights, TV and everything off when you are not using them.  You can really save a big by not wasting electricity.
5. Don’t leave your wallet on empty.  Always carry cash around in case you need to buy something at a place that either doesn’t accept cards or charges you extra for using your card.  One example I have seen in recent times is gas stations.  Seems like gas is a good 10% more expensive if you want to use your card.  Having cash on hand can save you a few bucks at the pump.

One thing that I see constantly ruin people’s finances is buying a car that is way too expensive for them.  All you really need a car for is to get you from point A to point B in a timely, reliable manner with a side of comfort and safety.  How much time to you actually spend in your car?  An hour a day?  How much do you spend in your office chair?  8 hours a day?  Maybe you should spend thousands on a sweet office chair rather than your sweet car that you only use a little each day.

Your need for speed will quickly eat away at your savings.  Faster cars are usually less gas efficient, and your gas bill will simply increase.  You get a few tickets or accidents, and the expenses quickly add up.  You have to pay a few hundred for the ticket itself, take some time off work for traffic school, and also pay more for your insurance for the next three years.  Start buying some more performance parts and you are really starting to hurt.

If one of your hobbies is cars, and you actually have the spare change to lose on your interests, by all means, enjoy yourself.  However, if you are justifying buying a money-pit because you need a car to get to work, consider buying some used sub-compact.

If you are having a difficult time qualifying for a standard mortgage, FHA loans are a good option.  There are several advantages that an FHA loan has over regular loans, both to the borrower and the lender.  There are also a few drawbacks, but in this market, just getting a loan can be enough to outweigh any of the drawbacks.

1. You can typically qualify for a larger loan with a substantially lower down payment.  You can put as little as 3% down and finance up to 97% of your home value.
2. The requirements to qualify for an FHA loan are typically less stringent than traditional mortgages.  As long as you have a stable job with stable income, you should have no problem finding a mortgage.

The advantages that the lender has are:

1. Government insurance on the loans in case of default.  They are backed up in case you default, so they can loan money with considerably less risk.
2. The lenders can make more loans since they can lend more money to a larger pool of borrowers.  Also, since they are lending at 97% of the value, their mortgages are larger than if they were only lending 20% of the value

There are a few drawbacks to getting an FHA loan:

1. You have to pay the government insurance premium.  This is usually only a half percent of the mortgage, so it really isn’t going to be a deal breaker, especially if you can’t get a mortgage anywhere else.
2. There are limits on how much you can borrow.  You can’t get 97% financing on a million dollar mansion with an FHA loan.
3. You have to occupy the property for at least one year.  You can’t get an FHA loan for an investment property that you plan on renting out.  This won’t be an issue for the average person looking for a new home.

Overall, the FHA market is booming in recent years with the whole financial and lending crisis.  Talk to your lender to get all the details on the FHA loans and regulations in your area.

It is time to move, and one of the largest factors when determining a place to live is the monthly rent.  Location, house or apartment condition and neighbors play a factor, but when all is said and done, you really want to be saving money on rent.  Afterall, housing is usually your most costly expense on your family’s budget.

Sometimes we forget to add other items into consideration, and just look at rent.  Here are a bunch of costs to consider when trying to determine which place to rent:

1. Location.  If you live in a place that is really removed from everything, you have to consider the extra miles you will have to be driving to go to work, get groceries, see a movie, see friends, etc.  Not only should you tally up the extra gas you will be using, but you should also account for wear and tear on your car, and your own time wasted behind the wheel.  I have looked at places which would have ended up costing me hundreds a month extra just in fuel/car costs based on the location.
2. Utilities.  Sometimes all utilities are included in your lease.  Sometimes it might just be water, sewer or trash.  Sometimes nothing is included and you have to pay them all yourself.  Don’t forget to include water, sewer, trash, gas, electricity, cable, internet, phone, cleaning, etc.
3. Heating/Cooling.  An air conditioner might be nice, but will usually end up costing you more rent and will hit you hard on your electricity bill.  Also, consider the climate in which you are considering living: Will you use the heat and air conditioner a lot?  What about the unit size?  If the place is huge, it will cost more to heat and cool than a smaller place.  Finally, how old/efficient is the building?  Crappy windows and old insulation will cost more to heat or cool than a place with nicer windows and newer insulation.
4. Cost of living adjustments.  If you live right in the center of a wealthy city, expect to pay more for pretty much everything.  If you are living outside the city in a much more affordable neighborhood, you should be able to pay less for everyday items such as groceries.

When you are comparing places to live, be sure to tally all the costs together to come up with a monthly total that the apartment or house will be costing you.  Apply the same procedure for all your prospective places and you will be able to do an apples-to-apples comparison of all the places.  The best way to do it is on a spreadsheet on the computer.

No money down, 0% APR, no payments until next year.  These are all phrases that we hear a whole lot these days.  Consumer financing has become available almost anywhere for nearly anything.  It used to be that you could get financing for your house and car, but now you can even get financing for a vacuum, couch or even clothes!

The need for immediate satisfaction is really the driver behind the availability in financing options.  You see that flat screen TV advertised in the newspaper with the “No Money Down” and “No Payments for Two Years”.  After that, it is only a hundred bucks a month for a couple of years.  No problem, I can afford that!  Well… can you?  By financing your TV, you are overpaying by a huge margin because of the cost of interest.  Once you have everything paid off, you ended up paying way more than the sticker price for something that has already lost a ton of value.

Just because you are making installments on something, doesn’t make it any less expensive.  $900 seems like a lot of money, but $30/month for three years sounds like a lot less, even though it ends up being a lot more.  Also, you might not have $900 just lying around to spend on a TV, but can easily commit to $30 a month for the next three years.

Financing something that you can’t afford and can easily live without may make sense in the short run, but it will really end up hurting you in the long run.

Financing an investment is called “leverage” and is usually considered a good thing.  It helps you make more money.  Financing a consumer good is called “consumer debt” and is usually considered a bad thing.  It helps you spend more money.

Just make sure you really need something before you buy it.  One trick I use is the 21 day rule.  If you see something that you want, promise yourself that you won’t buy it for 21 days.  If, at the end of those three weeks, you are still just as excited about it, go ahead and buy it.  If you aren’t, it might mean that you were only caught up in the moment and you really don’t need that item.