How to Maximize Your Severance

by Kevin

Long gone are the days where you got a good education, made good grades, got a good job, and retired 35 years later with a gold watch gift from the company for your decades of service. The new world economy is constantly changing and most of today’s graduates can expect to hold 5-15 jobs depending on their industry. Companies are started that change the world within a few years — Twitter and Facebook didn’t exist in the 90s — then are bought, sold, or extinguished through innovation from an unexpected competitor. Additionally entire departments are now being outsourced to service companies or overseas workers.

In this new economy you should expect to receive a severance package at least once in your life when your company either goes under or outsources your work. As unfortunate as losing your job can be, you need to avoid reacting emotionally and maximize your severance so you get the most benefit out of the situation.

When Will I Receive My Severance?

To plan to spend or invest your severance you first need to know when exactly you will be receiving it. The date your severance will be paid to you is dependent on your company and the reason you are receiving a severance. If your company or division is being closed you are probably receiving a severance to help keep the lights on and the company operating until the switch over. The severance needs to be laid out in a contract that the company signs with you. In this contract you should find the date that you must stay employed with the company in order to receive the severance. The whole idea for the severance is to incentivize you to stay long enough to keep the doors open for the transition.

What Should I Do With My Severance?

There’s a bunch of things you could do with your severance… go on vacation, buy a nice new car, or splurge on eating out. You can enjoy these splurges if you can afford it. Check these three needs first:

Cover Expenses During Unemployment

The only way you can afford to do anything with your severance package is if you have secured employment following being laid off from your company. If you haven’t and are still interviewing, you need to keep as much severance as possible available to pay for your day to day expenses.

Pay Off Debt

If you’ve got employment to follow getting laid off, one of the next best uses for any windfall like a severance is to pay off high-interest debt. Completely paying off debt will free up the cash you are spending each month on the payments which you can further use to pay off other debts.

Finish Your Emergency Fund

If you don’t have an emergency fund then your severance should be used to establish this important financial device. If you’ve started building your emergency fund but have been side tracked by emergencies, then a financial windfall can be used to finish it off.

Hopefully your severance is big enough to finish your emergency fund, pay off some debt, and enjoy some time off, but don’t waste it. It isn’t very often that your employer will hand you thousands of dollars to keep working in your regular job, so hold this opportunity in high regard and maximize the chance to improve your situation.

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Is It Too Late for Your 2011 IRA Contribution?

by Kevin

Don’t you hate when you intend to do something but life gets in the way and keeps you from getting it accomplished?

If that happened to you last your with your ambitions of opening a Roth IRA, don’t worry: you still have time to fulfill your contribution limit for 2011. Why can you still contribute to a Roth and how much time do you have?

When Do Roth Contributions Cut Off?

If you intended to set up an account with a Roth IRA provider but didn’t get around to it, have no fear. The time cut off where you will no longer be able to contribute for the previous tax year is April 15th of the following year. So for tax year 2011, you can contribute to a Roth IRA until April 15th, 2012. Once that date passes you will no longer be able to set aside money for a tax-free retirement for the previous year.

Don’t Fund This Year, Contribute to Last Year

Before you send a single cent in for the current tax year you want to make sure you absolutely maximize the previous tax year. There is no reason to not put in a full $5,000 for the previous tax year before you even start on this year’s contribution limit. Once April 15th goes past you won’t be able to go back in time to then contribute again. Even if you don’t think you will max out your contribution limit this year because you are just getting started, it is much better to put all the money you can now toward last year. You’ll have another full year from April 16th to the following April 15th to maximize your contributions for this tax year.

Can I Contribute to a Traditional IRA Late?

The Internal Revenue Service has the same rules for both Traditional IRAs and Roth IRAs. That means you can still contribute for a 2011 Traditional IRA until April 15th of this year.

Starting a Late Traditional or Roth IRA

Even if you haven’t opened an account with a brokerage firm to hold a Traditional IRA or Roth IRA, you can still do so until the April 15th deadline. You will need to decide which account works better for you. Every situation is different, but there are some general rules of thumb to help you make your decision:

Pick a Traditional IRA if…

  • You expect your tax bracket to decrease in retirement. If you are in the 33% tax bracket today, but anticipate being able to drop your income down enough during retirement to only be in the 25% tax bracket, you should use a Traditional IRA. You’ll avoid paying 33% tax today and pay 25% tax in the future, saving 8% in tax alone.
  • You want a tax deduction. Sometimes you just want to drop your tax owed down. With a Traditional IRA you get a tax deduction today, so contributing a full $5,000 could save you $1,250 if you’re in the 25% tax bracket.

Pick a Roth IRA if…

  • You expect your tax bracket to be higher in retirement. If you are in a low tax bracket (25% or below), but expect to sock aside enough money for retirement that you’ll be in a higher tax bracket despite no longer working, you need a Roth IRA. You’ll pay the lower tax now and never pay tax on your nest egg again.
  • You think tax rates will increase over time. Alternatively, even if you in a higher tax bracket, if you anticipate income taxes going up to make up for the trillions of national debt we have, you might want to use a Roth IRA to avoid that higher tax in the future.

Do both…

  • You don’t want to commit to one strategy. If you aren’t sure which way tax brackets will go or whether or not you’ll be in a different bracket in the future, you can just use both types of accounts. You can’t contribute $5,000 to both accounts ($10,000 total), but you could contribute $2,500 into each. This doesn’t put you “all in” on one strategy where being wrong could cost you a lot of money. You’ll be right (or wrong, depending on how you look at it) by splitting your contributions into both accounts.

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Should You File Your Own Taxes?

by Kevin

Tax time just began in the United States. If you’re like me you are compiling receipts, financial documents, and impatiently waiting for W2s or 1099s to arrive in the mail. You’ve probably already seen lots of web advertisements online for special discount codes on tax software so you can file your tax return from the comfort of your own home.

But is it wise to file your own taxes? Would you be better off using a professional to file them for you?

When and Why You Should File Your Own Taxes

Filing your own taxes is almost a rite of passage. You’re finally making enough money to matter! Here’s your form, fill it out, and pay taxes as part of your civic duty. But there are multiple reasons to file your own taxes:

  • You’ll get to see first hand the impact of financial decisions you made throughout the year. Did you donate money and had forgotten about it? Did you take time to set up that Traditional IRA and it saved you $1,000 on your taxes? Or did you put down too many allowances on your W-4 and are now paying the price by owing the government money?
  • You’ll see just how complicated it can be. Even if you only file your own taxes once, I think it is important to see just how crazy all of the forms can be. It can definitely get overwhelming.
  • You want to save money. This might be a bit of a misnomer. You can definitely save money by doing your taxes on your own with paper tax forms. Tax software can run from $10 to $50 if you want to step up, and even that is a saving over the cost of a CPA to do your taxes for you. If money is tight, you can do them on your own.
  • If your tax situation is simple. If you had one job, had no major life changes, don’t itemize your taxes, and take the standard deduction, you can probably get by on doing your own taxes. The more simple, the better.

When and Why You Should Use a Tax Professional to File Your Taxes

It my only take one time of trying to do your taxes on your own for you to throw your hands up in disgust, vowing to never do that complicated math ever again. Enter your local friendly tax professional. While doing your own taxes can be quite the education in complicated bureaucracy, sometimes using a professional just makes more sense:

  • The US tax code is incredibly complicated. It isn’t exactly fun to sit down and flip through pages of instructions in order to fill out one form. It can take a long time to fill out a tax return correctly. Plus, when things are complicated…
  • You are more likely to make mistakes. Tax return mistakes are usually expensive mistakes. Whether it means your return gets audited or you simply miss out on an extra $200 for your refund, you can be costing yourself a lot of money by doing it on your own.
  • A tax professional might save you more money. Yes, tax pros like CPAs do cost money. And they won’t always save you more than you could have gotten on your own. But the return will be accurate, you’ll get your maximum refund, and if you get audited you have someone to blame.
  • If your tax situation is complicated. Run a business? You need an accountant. Changed jobs this year, moved across state lines, had a baby, and started a side business to boot? You need a tax professional to get your return right.

Most of the tax software out there is pretty good. Even if you decide to go it alone, you might consider using a professional to review several years worth of returns at a time every few years. You can always file an amended tax return to get any found money back.

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How to Get Get Hired in the Job You Want

by Kevin

If you are lucky enough to be employed in this somber economy, you might think it crazy to consider a job change. Perhaps you just came off months of unemployment and are just happy to be working for a check once again. But if we’re really honest with ourselves, we might not think our current job is the job we want to have for the long term. A paycheck is nice, but feeling fulfilled in our work and also getting paid for it is even better.

Make this year the year you make the move to the job you really want. Don’t settle for less. You might switch jobs because you don’t like your line of work, for a better pay rate, or for a better company.

How to Switch to an Awesome Job

Here are a few tips to help you better you work — and financial — situation by switching jobs this year.

Build Your Network

In a high unemployment economy it is hard to stick out from the crowd alone. Some surveys have shown that anywhere from 67% to 75% of all people find their next job through their professional network. If you don’t want to be stuck in your current role forever you need to build up a network of professional contacts.

Here’s the kicker with networking: you can’t decide to build your network the week you need a new job. You should be building your network throughout your career so that in the time you do need something, you’ve built up enough goodwill that people want to help you. It isn’t the same as calling in favors, but if you’ve done a good job of helping your network it is much more likely to do a good job of helping you.

Document Your Accomplishments

There are a lot of ways to put together a resume. Some of them are great. A lot of them are terrible.

Building your resume is similar to building your network. You don’t want to sit down the day you decide to apply for jobs and think back about your accomplishments from the previous 4 years of work. If you wait to do it all at once you will inevitably forget many of the accomplishments you had over the previous years. You need to note significant projects you completed or participated in as well as the impact to the organization.

Another resume tip: don’t be afraid of detail. Now, there are limits to this. No hiring manager is going to read a 5 page resume at a font size of 4. But there also isn’t a huge problem in having a second page on your resume, especially if the detail in the resume draws out important details that a hiring manager would want to read.

And never put an objective on your resume. An objective, no matter how many flowery words you put into it, is essentially saying “I want a job with you”. Save yourself space and put more of your qualifications on the front page.

Apply Selectively

If your network is unable to get you in touch with the right people for a specific company or job, you need to apply on your own. Or maybe you’re just looking for a new opportunity and are open to a couple of options. Be very careful here. Applying en masse to a bunch of jobs — especially with the same company — reeks of desperation. Companies are able to see that you’ve applied to 6 jobs in the last week with them. You aren’t being selective, you’re just shotgunning your resume out in hopes of it sticking somewhere. Employers don’t want that type of employee. They want the employee that is a good fit for the role, targets their resume to the job, and applies once.

These tips won’t guarantee you success in moving to the next job, but greatly increase your odds of a successful transition this year.

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