Paying taxes is a necessary evil that most people hate to do. However, not paying your fair share can leave you in debt or in trouble with the law. Taxes are complicated and most people don’t understand what is going on. Most people subscribe to either withholding more than needed from their income so they get a higher return at the end of the year or lowering their withholding amounts so they reap the benefit of their money right away.
If you are not tax savvy the first option is probably the best way to go. Choosing single and zero (S-0) or married and zero (M-0) will make sure enough taxes are withheld from your paycheck and you get a large return at the end of the year. If you want to receive more money back from your paycheck, all you have to do is follow the W-4 worksheet your employer provides you and mark down the appropriate exemption amount. When you use the worksheet, more than likely you will have more than enough taxes withheld from your paycheck and still get a small return at the end of the year.
If you want to enjoy the benefit of your money upfront, are self-employed or have taxable investments you have to worry about paying taxes on things get a lot more complicated. This is definitely not a money 101 topic. The best thing to do in this situation is to pay a tax professional to look over your financial picture and provide you advice. If you are cheap like me or you think you can handle it you can try and figure out how much to pay or have withheld yourself. You can find many calculators around the Internet to help you or you can wade through the resources at the IRS website. (http://www.irs.gov)
Basics of Investing
Making smart investments is important so you can maximize the return on your money. The basic and easiest investment choices are bonds, mutual funds and stocks in that order.
When you purchase a bond you re loaning money to the government or a corporation. With bonds you enjoy a fixed rate of return at a fixed date of maturity so you know exactly how much your investment will be worth. The best thing about bonds is they can be used a set and forget investment choice as long as you don’t withdraw your money early. You can also make more money from bonds if you want to chase the bond market but that is an advanced investment strategy and not a money 101 strategy.
If you want to invest in stocks but don’t want to take the time to learn how to choose the best stocks mutual funds are the way to go. The way mutual funds work is a financial manager chooses the best stocks they believe will give them the highest rate of return of the long haul. They then lump all these stocks into one fund called a mutual fund. A share of the mutual fund is then sold to investors. If you choose a mutual fund you don’t have to worry about picking individual stocks, diversifying your stock portfolio or other advanced stock investment strategies. It is an easy way to get started investing and you only have to choose and keep track of one “stock” instead of several. However, be warned mutual funds can be as risky as picking individual stocks. It is usually better to choose one that follows an index such as the S&P 500 or similar.
You really have to know what you are doing if you pick individual stocks. Picking individual stocks are not for the faint at heart but if you are willing to learn you can enjoy large returns on your money. Individual stocks are not a Money 101 strategy and you should stay away from them unless you are willing to learn about them. One of the best resources other than this article to help you learn more about picking individual stocks is the Fool.com. They are a bunch of smart cookies over there and really break it down real easy for you.
Planning for Retirement
Almost everyone wants to enjoy a nice retirement. However, to do this you need to have a long term plan in place. Combined with an employers pension plan 401k(s) and IRA(s) are the usual way people save for retirement. You also have to take into account estate planning and medical/ life insurance options.
Hiring Financial Help
If you need help setting up a financial plan hiring a financial advisor is the best way to go. The best financial advisors can help you get this part of your life handled. Yes, it will cost you money but it will make you more money over the long term. Financial advisors can provide you with investing advice, help you set up a budget, help you set up a plan to pay off debt and many more services. What you can learn from a financial advisor can be more valuable than taking a lengthy money 101 financial management course.
Look for a financial advisor that has a set fee rather than one that will charge you a percentage of your investments. If they only charge a flat fee they are less likely to only push investments on you that they earn a commission from. If they are earning a commission on an investment, and they are lacking in the morals department, they may give bad advice just so they can earn money. Also make sure they have earned credentials like the Certified Financial Planner certificate.