Can you spin straw into gold?

I’ve had a lot of conversations lately about squeezing more growth out of low-risk investments. Here’s two examples:

  1. Some bank certificates of deposit (Navy Federal, Andrews Federal) are offering annual percentage yields (APY) of 3%, the highest rate in years. A friend considering CDs for his emergency fund asked, “Why would I put my emergency fund in CDs when I can invest in dividend stocks and get better returns?”
  2. A coworker needs to replace a safe investment in our old 401k with a similarly safe investment in our new 401k. She’s concerned that the new investment had a lower annual return (2.7% vs 2.5%). However, it also had substantially lower fees, meaning its net return was substantially higher (1.9% vs. 2.4%).

The first immutable law of investing is that higher returns are rewards for higher risk. Stocks have historically higher returns (7-10% annual average growth) than bonds (5-6% annual average growth) because there’s less risk in lending to a company than owning it. Savings accounts have higher rewards than checking accounts because you are limited in how frequently you can withdraw from your savings account. Have there been periods when bonds outperform stocks? Of course, see the 2008 financial crisis! But over a long time, riskier asset classes outperform safer assets.

Unless you can spin straw into gold, you can’t get better returns without higher risk.

So for my dividend-stock inclined friend, yes, we would expect dividend paying stocks to yield higher returns than CDs over time because they are far riskier. However, there’s no guarantee that stocks maintain their value and you can lose your principal. A CD returning 3% will never lose principal and never yield less than 3%. If you are willing to lose your emergency fund, invest in riskier assets. If not, then take the guaranteed 3% and be happy.

The second immutable law of investing is that death, taxes, and fees are certain, returns are not. A return of 2.5% with no fees and a return of 5% with 2.5% fees have the same net result, 2.5% growth. But in a bad year, a return of 0% with no fees is unpleasant but a return of 0% with 2.5% fees is a net loss.

When comparing investments, always compare expected future returns vs. inflation and the cost of investment (fees, taxes, commissions). Since I cannot predict the future, I give far more weight to keeping predictable costs low than unpredictable returns high. Look at the table below, which of these bond funds is the best investment for protecting principal assuming an inflation rate of 2%?

Investment Expected Annual Return Fees Real Return Inflation Return after Inflation
3-year CD 2% 0% 2% 2.00% 0%
Actively Managed Bond Fund 3.00% 0.90% 2.10% 2.00% 0.10%
Bond Index Fund 2.50% 0.10% 2.40% 2.00% 0.40%

If your primary goal is to protect your principal, pick the 3-year CD. If you’re willing to take on a little more risk, pick the Bond Index Fund. Even though it underperforms the actively managed fun by 0.5%, it’s return after fees is greater. However, only the CD is guaranteed to return 2% per year.

Before investing in fixed income investments, keep these questions in mind. Notice how “what growth do I need?” is not considered. If you’re not willing to take a short-term loss on your investment, then expected growth is a secondary consideration.

  1. Can I lose my investment? If you can’t live with a 10% drop in value, you need a safe investment. If you can live with an immediate 50% drop in the value of your investment, then you should invest in risker assets such as stocks or real estate.
  2. When will I need to make my first withdrawal (liquidity)? If you might need the money tomorrow, deposit into a checking or savings account. If you can wait one year, invest in a 1-year CD. If you can wait longer, consider bonds, bond funds, or long-term CDs.
  3. How can I protect my principal (minimize risk)? For government bonds, CDs, and savings accounts, you can expect to at least withdraw whatever you put in.
  4. How can I defend against inflation? If annual inflation is 2% and your annual return is 1.8%, you’re losing 0.2% in purchasing power per year. You’re not losing money per se, but what you have is worth less.If you’re investing for the short-term a 1% savings account is still better than 0%. If you’re investing for the long-term, you need to be reasonably certain your investment will beat inflation.
  5. Can I add more growth above inflation? If annual inflation is 2% and your investment returns 2.5%, your net gain is 0.5%. It’s not too difficult to find longer-term investments (government bonds, high-yield CDs, bond index funds, etc. ) that beat inflation, but checking and savings accounts tend to have returns below inflation.
  6. Can I minimize taxes on growth? Since growth is guaranteed, so are taxes. If annual inflation is 2% and your investment returns 2.5% and your effective tax rate is 20%, your net gain is 0.4%. If you’re willing to hold your fixed income investments in your retirement accounts, you can avoid (Roth) or delay (401k, traditional IRA) paying taxes altogether.

How do you approach your fixed income investments? Where do you keep your emergency funds? Have you taken on riskier investments in a low-interest rate environment?

IRS Free File: Get H&R Block and TurboTax for Free

After four years of TurboTax I’m switching over to H&R Block’s tax prep software. Why? It’s free through IRS Free File and just as easy to use.

The IRS Free File program directs taxpayers to free tax preparation solutions depending on the complexity of returns, income level, and location. If you qualify, you can get TurboTax, H&R Block, and other tax prep solutions for free. According to the IRS, 70% of taxpayers are eligible to complete their taxes for free.

Here’s a curated table of IRS Free File promotions limited to solutions with free federal and state returns. Remember that “income” is your Adjusted Gross Income. So if you had an $80,000 salary and no other income in 2016 and contributed $18,000 to your 401k, your AGI is $62,000 and you qualify for free H&R block federal and state filings. If you instead only made an IRA contribution of $5,500, your AGI would be $74,500 and you would not qualify.

Max Adjusted Gross Income Max Age Free File Solution
$33,000 N/A TurboTax
$51,000 60 FreeTaxUSA
$52,000 56 TaxAct
$64,000 65
$64,000 N/A Online Taxes (
$64,000 50 H&R Block

Because my 2016 adjusted gross income band is above $33,000 but below $64,000, I qualify to use H&R Block for free federal and state filings but not Turbotax. I uploaded my prior year’s TurboTax PDF and was off to the races. Other than the green vs. blue aesthetic, I found H&R Block to be virtually identical to TurboTax and had everything done within two hours (pending a few tax forms still in the mail).

Kudos to the FinanceBuff and the New York Times for reminding me to check for free tax options.

I’m curious how all of you are doing your 2016 taxes. Do you use software? Have someone prepare for you? Do it by hand? Let me know in the comments.

Why are we even having this interview?

In every job interview I ask these questions about the potential employer:

  1. What is your firm’s mission?
  2. What are your firm’s competitive advantages?/What are the top three reasons customers choose your firm? (For non-profits, replace “competitive advantage” with “unique qualities”)
  3. What are your firm’s goals for growth over the next 1, 3 and 5 years?
  4. How does this position support the mission and goals?

Most recruiters and employees (frankly, most execs) cannot answer these questions because they don’t concern themselves with work outside of their role. Most recently an interviewer’s response was: “I’m the hiring manager, so I only focus on getting people in the door and leave running the business to executive team.”

So I thought, “Oh, really? So you can find the right person to grow your firm even though you don’t know what your company does? Or why customers want to work with you? Or the specific challenges your company is trying to solve by hiring me? Or how I could provide value outside of the listed job requirements?”

But instead I said, “I’m eager to learn more about your firm’s goals, how this position fits into those goals, and how I can best provide value. What’s the best way to learn that?”

And she offered, “You should speak with Sally (decision maker). Are you free next week?” And now I can have the conversation I want to have with a decision maker.

Does this always work? No. But when it doesn’t, I know it’s a bad fit. If an employer doesn’t want to hire me because I ask “why” too much, we’re not going to get along anyways.

If you already have a job and you cannot immediately and effortlessly explain why your employer exists, why your customers work with you, and what you’re trying to accomplish, then how can you:

  • Identify new opportunities if you don’t know what a good opportunity looks like?
  • Improve business processes if you don’t know the optimal outcomes?
  • Refer a friend if you don’t know how they would benefit the firm and vice versa?
  • Build valuable skills if you don’t know what skills are valuable?

So if you don’t know, drop everything and find out. Ask your boss. If they don’t know, ask their boss. If they don’t know ask the CEO. If they don’t know, help them figure it out or leave. After all, if no one knows why they’re there, why do you keep showing up?

Guest Post: Intro to Income Taxes and Your Paycheck

Editors’ note: I’m excited to introduce Krista D’Innocenzo as a guest poster. Krista is a mechanical engineer graduated from the Colorado School of Mines. To kick off 2017, Krista gives an introduction to Federal Income Taxes and addresses the persistent myth that you should take a lower salary to avoid taxes.

When I saw that Will was working on a personal finance blog, I figured I’d follow along, since personal finance is a passion of mine. As someone who has been all over the financial “spectrum,” I reached out to Will because I want to share my experiences and findings (and especially mistakes) so that others can learn. I am by no means an expert and obviously I don’t know all the answers. I’m merely someone who gets depressed seeing all the articles claiming “1% of millennials have more than $10 in their bank accounts!!” and wants to do something about it.

Why do I care?
When I first started looking at information about personal finance, I was bombarded with books and articles where the first paragraph had acronyms like 401k, Roth IRA, VSTMX, and ETF and my eyes would just glaze over. I had no idea what any of those words were and all the information I found seemed to assume I already had a working knowledge of personal finance. My goal as a guest contributor is to explain what I know about personal finance in basic terms that anyone can understand.

Learning to control your finances is powerful because it will take you to a place where you are truly in charge of your life, rather than a credit card company or the bank that owns your student loans. The reality is that most of our generation was never taught personal finance and has graduated with student loan debt; it can feel pretty depressing to be in a hole that you see no way to climb out of. Some have graduated with little debt and a high paying job, but have no idea what to do with the money. Some may be saving up to buy a house or have a child but feel that dream is unreachable. My goal is to be able to share the information I’ve learned from being in these situations so that others don’t have to go through the struggle that I did to find it.

My Financial Goals
I approach my personal finances with the goal of financial independence, living a lifestyle independent of income. My goal is to eventually retire early and live off of passive investments within the next 16 years. While this lifestyle isn’t for everyone, it’s more easily attainable than you might think. While I do my best to live somewhat frugally, I am by no means a spendthrift and still enjoy traveling, eating out, and buying tech gadgets. I hope to be able to offer information to others who want to retire early as well as those who don’t.

Introduction to Income Taxes
When I first looked at my first paycheck as a teenager, it shocked me to see the government take so much of my money, the horror! With time, I’ve grown to enjoy seeing my sweet, sweet tax refund check arriving each year in April. Who knew I’d be so excited about providing an interest free loan to the federal government?! Let’s start with all the different types of taxes you’d typically see on your paycheck:

Federal Income Taxes
When most people curse the IRS, it’s in reference to their federal income taxes, taxes paid to the federal government deducted from your earned income (salary, Social Security benefits, investment income, etc. ). The U.S. follows a progressive tax system, meaning that as income increases so does the rate of taxation. This leads to different tax rates ranging from 10% of the first $9,275 earned to 39.6% of income earned over $415,050 per year. Bands of income receiving the same tax rate are known as “brackets,” and 2016 tax brackets are as follows:

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $9,275 $0 to $18,550 $0 to $13,250
15% $9,275 to $37,650 $18,550 to $75,300 $13,250 to $50,400
25% $37,650 to $91,150 $75,300 to $151,900 $50,400 to $130,150
28% $91,150 to $190,150 $151,900 to $231,450 $130,150 to $210,800
33% $190,150 to $413,350 $231,450 to $413,350 $210,800 to $413,350
35% $413,350 to $415,050 $413,350 to $466,950 $413,350 to $441,000
39.6% $415,050+ $466,950+ $441,000+

The Tax Bracket Myth
Have you ever heard someone complain about a promotion or raise because making more money would put them in a higher tax bracket, causing them to take home less money than they did before? This is a myth caused by people mistakenly assuming that their highest income tax rate will apply to all of their income. This is false and easy to debunk if you look at how these tax rates work. Let’s say you are a single person who made $35,000 this year. Your federal income tax you would be 10% on the first $9,275 earned plus 15% of the amount earned between $9,275 and $37,650. The math looks like this:

So at the end of the year, you have paid $4,786.25 in tax, which leaves $30,213.75 leftover. Now let’s assume you get a raise and now make $38,000, putting you just over the threshold into the 25% bracket. Now you pay:

So you pay $5,271.25 in taxes, leaving you with $32,728.75. You do pay more in taxes, as one would assume with a higher income, but at the end of the day you still take home more income. Remember, bumping up into the 25% tax bracket does not mean that your entire income is taxed at 25%, just the portion of your income above the lower tax brackets is taxed at that amount. More money gross always leads to more money net!

Your Status Is Not Complicated
What’s the difference between single, married filing jointly, and head of household? Single filers are people not married on December 31 of the tax year with no dependents. Married filers are people who are legally married on December 31 of the tax year. Notice that the IRS does not care if you were married until December 30th and divorced on December 31st, you will still have to file as single for the year.

Your Roommate is Not a Qualifying Dependent
Head of household filers are people who have dependents that live with them who they are not married to. The word “dependent” is the IRS definition of a dependent, which can be found here. In short, a dependent is a child or relative for who relies on you as their primary source of financial support. For example, divorced parents cannot both claim the same child as a dependent. Full criteria for filing head of household can be found here.

Income thresholds are higher for the married and head of household filers, because they are assumed to support more than one person. For married couples where one spouse makes much more than the other, this often manifests as paying less in taxes than if each person were to file as single. For married couples where both spouses have high incomes or both make very little, this often manifests as paying more in taxes than if each person were to file as single. To see if you and your spouse are getting a “marriage bonus” or a “marriage penalty,” check out the interactive chart here (using 2015 tax numbers).

State Income Taxes
Different states have different income tax percentages, and some do not take income tax at all. If you live in one state and work in another, or have income from another state, you will need to file tax returns in every state you have earned income (and possibly more). For more information, review this article from Intuit.

Social Security and Medicare tax
Social Security and Medicare taxes are withheld from your paycheck at 6.2% and 1.45% respectively, and only the first $118,500 (Social Security) and $200,000 (Medicare) earned each year are subject to these taxes for the 2016 tax year. It is important to note that the income limit for Social Security tax is being increased in 2017 to $127,200.

Tax Withholding
What does it mean to have tax withheld and how do you know if you will get a refund or have to pay taxes in April? The federal government knows that it can’t just take money for taxes as a lump sum once per year, because a vast majority of people would not have funds available. Therefore, taxes are withheld by your employer on each paycheck at a rate that is dependent on your income, your pay schedule, and how many deductions you’ve claimed with your payroll department. Think of withholdings as an estimation of roughly how much tax you should pay. At tax time, the amount that was withheld (what you DID pay in taxes) is compared to the actual amount required and you will either have to pay more or you get some money back.

A refund means that you provided a short-term interest free loan to the federal government, but this may be the easiest way to handle your taxes if you do not want to take the time to figure out all of your deductions beforehand or don’t want to take the risk of estimating incorrectly. Deductions can be fairly complicated and are another blog post to themselves, and obviously I am not a tax professional and your personal situation may vary. Consult with a CPA for specific advice on your own taxes.

Why money matters

I still find it difficult to articulate why I care so much about money. I have no debt, a good job, a good work-life balance, and by most standards, a pretty easy life.

However, I also remember who I am when money is tight. At 25, I had high blood pressure because I worked in a job I loathed. I worked 10-12 hour days because I thought it was the only way I could succeed. I pushed people to buy things they didn’t need, understand, or would benefit from. I barely slept 4-6 hours per night. I ate cheap, terrible food because there was no time to cook or simply forgot to eat at all. I canceled time with my girlfriend and friends to work more. I felt exhausted all the time and slept all day on weekends.

In 2015, I finally hit my breaking point and quit my job. It wasn’t smooth sailing from there because:
  • I had moved into a one bedroom apartment with a high rent ($2,100 per month plus utilities) I could barely afford.
  • My old employer tried to get me fired from my new job.
  • My longest close friendship ended primarily due to financial disagreements.
  • My long-term girlfriend and I broke up. Finances and work-life balance were major factors.
  • My new employer was acquired by another company, so I was laid off and started a new job working as a federal consultant.
By December 2015  I was back to being lonely, exhausted, on my 3rd job of that year, and treading water financially. Reviewing 2015 I took away these lessons:
  • I want to work because I choose to, not because I have to.
  • Poor finances can ruin rich relationships.
  • Making good money with bad people is soul-crushing.
  • Making bad money with good people is untenable.
  • Nice things don’t fix loneliness.
So In January 2016, I reviewed my relationships, career, and finances, resulting in these four goals:
  1. Study and build a plan to no longer need to work as soon as possible (financial independence) by the end of February 2016.
  2. Spend less time at work (average 8.5 hours per day).
  3. Move out of my apartment and get rid of clutter when my lease expires in July.
  4. Try new experiences, meet new friends, and put people first by committing to a new weekly hobby.
 So in 2016, I:
  • Adopted a new financial plan to not need to work by 2026.
  • Began a new relationship with my lovely girlfriend!
  • Spent less time at work and now average 8.5 hours per day.
  • Learned Dungeons and Dragons and continue to play every Monday with an awesome group of guys and gals.
  • Move to a smaller, lower-cost studio apartment in July.
  • Cooked the majority of my meals.
  • Saved around 50% of take home income.
  • Switched my employer to a low-cost 401k plan and cover all plan administration costs.
Money isn’t everything, but it reduces stress and frees time to let me focus on who and what is most important to me. I started this blog to share what I’ve learned and hold myself accountable to my financial plan. If there’s any of you feeling like I was in 2015, I wish you a better new year and hope this blog can help you find your solution.

How to game your credit score

A few readers have reached out asking how to raise their credit scores, specifically their FICO scores. Luckily, it’s easy to game your way to a better score without accumulating any debt.

Image from Dennis Eakin Kia

Credit scores vs. credit reports

Credit scores and reports are not the same. Credit reports are a history of your debt and include prior loans, missed payments, credit inquiries (when you ask for a loan), and other specific actions that may give a bank pause before extending you more credit. Credit reports are provided by three companies: Equifax, Experian, and TransUnion. You can obtain a free copy of your credit report once per year for free from each of these agencies.  Credit reports do not have a number or score.

A credit score, such as your FICO score, is a formula used to assign a numerical value to your creditworthiness (the likelihood you can pay back a loan) using the data in your credit report. You are not entitled to a free copy of your credit scores (though there are free ways to get them).

How are credit scores used?

Credit scores only matter if you’re seeking a loan. If you don’t need a loan, you don’t need a credit score. The purpose of credit scores is to asses your likelihood to pay back a loan and determine the terms of the loan (interest rate) available to you. However, credit scores and reports have crept into employment screenings, background checks, insurance applications, rental applications, and other evalations of financial fitness or character.

How are credit scores calculated?

Not all credit scores follow the same formula. The most popular score, FICO  (Fair, Isaac, and Company), ranges from 300 (awful credit) to 850 (perfect credit). According to, FICO scores approximately follow this formula:

  • 35% – Payment history: The more late payments, the lower your score. Over time, a history of on-time payments can balance out a prior late payment.
  • 30% – Amount owed: The more you owe, the less likely you will be able to pay off new debt. Using more than 30% of your available credit (utilization ratio) on any individual credit card will also hurt you.
  • 15% – Length of credit history: The longer you’ve successfully managed a credit card or loan, the less risky you are for a new loan.
  • 10% – New credit: Applying for six credit cards at once will raise eyebrows. The more often you ask for new credit, the riskier you are for a new loan.
  • 10% – Credit mix: Lenders prefer to see debtors with a mix of installment (mortgages, auto-loans) and revolving (credit cards) credit lines.

What doesn’t affect your credit score?

  • Anything not related to debt – If you pay all your bills on time, have no credit cards, and are completely debt-free, you have no credit score.
  • Debit or prepaid card transactions – You do not receive a loan to make debit or prepaid card transactions, so they have no effect your credit score.
  • Paying non-loan bills on-time – Paying your electric bill on-time does not affect your credit score. However, non-loan payments do affect your credit score when they’re unpaid and become debts.
  • Paying or carrying interest – Making the full payment vs. the minimum payment on a loan or credit card will not affect your credit score except for the total amount owed. It is never beneficial to pay unnecessary interest on a loan.
  • Closing a bank account or opening most bank accounts – Closing a bank account will not affect your credit score. Some banks will check your credit when opening an account.

What’s a good credit score?

An average to above average credit score is good enough to obtain favorable interest rates. The average FICO score is 670 to 739.

Score Rating Delinquency Rate
800 – 850 Excellent 1%
740 – 799 Above Average 2%
670 – 739 Average 8%
580 – 669 Below Average 28%
< 580 Poor 61%

Source: Experian

Opt Out Option

Again, credit scores only matter if you want a loan. If you don’t have credit cards or loans and pay for everything in cash, you have no need for a credit score and can live blissfully without one.

How to game your way to a good credit score:

If you want a favorable loan or credit card, it’s easy to build an average to above average credit score in two years.  A simple path from no score to an averagee score (700’s) is to:

  1. Open one credit card with no annual fees every 3 months until you have 3-7 cards.
  2. Never allow expenses to go above 1/3 of the credit limit of each card (utilization ratio).
  3. Pay balances in full every month on each card.
  4. Raise credit limits as high as possible every 6 months to lower your credit utilization ratio.
  5. If you don’t want to deal with an old credit card, charge an automatic $1.00 expense per month and set up automatic payments for the full balance.

After two years, you won’t have a perfect credit score, but as long as you keep your credit cards open, you’ll have no debt, a perfect payment history, few new credit inquiries, and a moderate credit history. If you already have a low credit score, this method will also work for you, it will just take a longer.

Trust, but Verify Your Paychecks

My two favorite days of the month are paydays. Seeing a deposit post in my checking account still sets my heart aflutter. But with my joy always comes a tinge of skepticism, “Is my paycheck the right amount?”

An American worker and her paycheck united in sweet ecstasy.

I’ve worked for nine employers in my life. The number that have always paid me the right wages, on time, with accurate withholdings is one. At every other job, I’ve either had to prove to my employer that my paycheck has an error or accept a loss on earned income. I even quit my first salaried job specifically because of frequent payroll errors.

This post dives into common payroll errors (all of which have happened to me) that you should look out for and how to resolve them. At a minimum, everyone should review their wages before the end of each year, but I recommend completing this assessment before the final pay period of every quarter. That way, if there is an error, there’s time and funds available to fix it.

Below are seven basic compensation errors. Notice that errors almost always occur when something in your compensation formula changes, such as when you change your 401k contribution, move across state lines, or receive a promotion.

Error Typically occurs when:
Wrong Wages New job
Raise or promotion
Missing Bonus After bonus payout deadline (end of quarter)
Missing Expenses Expense request submitted
Incorrect Taxes/
New job
New job site
Change of address
Incorrect 401k Contributions 401k enrollment
401k contribution change
Missing Paycheck New job
End of job (fired, laid off, quit)
Paid Time Off (PTO)/
Vacation Error
New job
Promotion or increase in PTO

How to Resolve Pay Issues

The first time I noticed a pay error, I was livid. The tenth time? It becomes routine. Whenever I find a pay error, I try to remember this quote by Robert J. Hanlon, “never attribute to malice that which is adequately explained by incompetence.” No one is trying to swindle me, I just care infinitely more about my paycheck than anyone else.

If we assume incompetence, the burden falls on us to rectify the situation. Here’s a straightforward game plan:

  1. Always, always, always, keep separate copies of all records and communication regarding compensation including job offers, paychecks, expense reimbursements, bonuses, and anything else that may affect your compensation.Always keep copies on a separate location from your work computer. Keep a backup. If you lose your job, you don’t want to lose your compensation history too. If it’s not in writing or you can’t find it, it doesn’t exist.
  1. Review your next paycheck after any change to your compensation formula.If you submit an expense reimbursement request, make sure it is paid in full at the appropriate time. If you move to a new state, make sure you’re paying the taxes to the right state(s).
  1. If you suspect a problem, start by contacting your payroll department and only your payroll department. Your colleagues in payroll do not want to look incompetent. Ideally, you can make a quick email followed by a phone call to resolve the issue discreetly. My favorite strategy is to play dumb and ask for help understanding your paycheck, “Hey Bill, I noticed my last paycheck was for $X, but I expected it to be $Y because… Can you help me figure out why that’s case?” By asking for help, you’ll either receive a valid explanation for why the paycheck is right, or payroll will identify the error and resolve it.
  1. If the pay issue still isn’t resolved, escalate up the chain of command. If you can’t resolve the issue with payroll directly, raise the issue to your boss and ask for a timeline to resolution. Provide supporting documentation, be courteous, and have patience. The more people involved, the more likely your paycheck will transform from a clerical issue to a political one.
  1. If the pay issue still cannot be resolved, weigh legal options. Specific processes to recoup lost wages vary from state to state.  Unfortunately, unless you’re owed a substantial sum, the time and legal fees can easily cost more than the amount owed. It hurts to leave money on the table, but know when to give up.

Finally, keep in mind that errors go both ways! If an employer overpays you, flag it immediately and come up with a solution to pay it back. Not only is it the honest thing to do, you’re legally on the hook to pay back income you didn’t earn.

End of 2016 Checklist

As the end of 2016 approaches, I’m optimizing my spending and investment strategies to maximize tax credits and deductions for 2016. Below is a general checklist that I try to execute in the final quarter of every year.


  • Have you audited your income and expenses at least once in 2016?
  • Are you on pace to meet your savings goals?


  • Have you maxed out your annual 401k contribution limit ($18,000)? If not, can you increase your monthly contribution through the end of the year? Deadline is December 31, 2016 or your last paycheck in 2016.
  • Have you maxed out your annual $5,500 IRA or Roth IRA contribution? Deadline is April 15, 2017.
  • Have you maxed out your annual $3,350 HSA contribution (see below)? Deadlines is April 15, 2017.


  • Have you reviewed your paychecks for 2016 and confirmed you have been paid the correct amount? Every company I’ve worked for has had payroll errors, it’s worth checking.
  • Are you on pace to use all of your paid-time-off (PTO) or vacation days by the end of 2016?
  • Have you updated your resume and LinkedIn profile in the past 6 months?
  • Have you paid your dues and met educational qualifications for any professional associations you belong to?
  • Are you current on employer reimbursements for qualified spending?
  • If your employer offers a training budget or other benefits, are you on pace to spend your entire budget for 2016?


  • Are you overdue for free preventative care during your current plan year? Always complete your annual physical, 6-month dental cleanings, and annual eye exam.
  • Do you have proper documentation and receipts for your healthcare expenses?
  • If you have an HDHP, have you made your maximum tax-free HSA contribution of $3,350? The deadline for 2016 HSA contributions is April 15, 2017.
  • If you have an HSA, have you submitted your claims for qualified medical expenses for 2016? Deadline is December 31, 2016.
  • Does your health insurer offer any special benefits or wellness programs? Can you complete requirements for these programs before December 31, 2016?

Credit and loans:

  • Have you pulled your three free annual credit reports from Experian, Equifax, and TransUnion? Note that your credit report is required to be free by law, never buy anything from these companies.
  • Have you checked your FICO score (credit score) in 2016? I like Discover’s free FICO score tool, but most credit cards will now provide your FICO score for free.
  • If you have a loan, have you reviewed rates for refinancing in the past 6 months?
  • If you have credit card debt, do you qualify for a low-interest balance transfer card?
  • If you do not have credit card debt, are you on pace to meet promotional spending bonuses for new credit cards? If not, can you pull highly certain expenses from 2017 forward to meet the requirements?
  • Do you have expiring credit card points? Can you spend them before they expire?


  • Have you calculated your 2016 qualified education expenses? Do you have proper documentation and receipts for these expenses?
  • Are you eligible for education credits and deductions? For example, income above $65,000 may disqualify you for the Lifelong Learning credit.
  • Does your state offer income tax deductions for 529 savings plans? Here is a list of states providing income tax deductions for 529 contributions. The first $4,000 contributed to the DC 529 plan are exempt from state income taxes.
  • Have you made your annual 529 savings plan contributions? Deadline is December 31, 2016. This is most appropriate for those in school, those with children, or those with highly certain education expenses in their future.


  • Are you on pace to meet your charitable donation goals for 2016?
  • Do you plan to donate clothing, books, etc. in the near future? Can you pull these donations forward to 2016? Deadline is December 31, 2016.
  • Have you tracked and itemized donations to allow maximum deductions in 2016? If not, it’s time to start requesting receipts.

Automating Finances Part 1: Set Up a Tracking System

In January 2015 I wanted to automate my finances and take myself out of the equation as much as possible due to poor spending and investment decisions. To do so, I needed a way to track spending to know exactly where my money goes. Whatever tracking system I implemented needed to provide up-to-date answers to these questions:

  1. How much money do I have and where is it located?
  2. What is my average monthly income and total annual income?
  3. What are my average monthly and total annual expenses?
  4. Where, exactly, am I spending money, when, and how much?

These questions seem like no-brainers but were unclear because I used a mix of cash, debit, and credit cards that hid expenses because I could not see the whole picture of my finances. Further, because I took on odd jobs for extra income, looking at high-level net savings reports hid higher spending in months where I earned more.

Before making any changes to my finances, I attempted to complete my 2014 taxes, which would require all information needed to accurately calculate annual income for the prior year and show exactly where my funds are allocated. My search identified:

  • A Health Savings Account (HSA) from a prior employer I had forgotten about, and was bleeding money due to monthly fees.
  • Stocks I purchased through RobinHood that I don’t remember purchasing.
  • A savings account from a local bank in Colorado that I … misplaced.

I now had an accurate list of all accounts that held investments, savings, or debt (credit cards) and could begin building a tracking system.

Automate Finances Step 1: Setup a Tracking System

An effective automated tracking system should fulfill four basic tasks in an easily repeatable manner:

  • Consolidate income and spending information from all sources
  • Capture data for individual purchases including date of purchase, vendor, and enough information.
  • Export data to a .csv file for analysis in Excel or a similar program.
  • Automatically pull and display information to provide an accurate financial snapshot with little effort.

Luckily, I had already set up the infrastructure for a tracking system by signing up for Mint is a free service that automatically pulls account information from most savings, checking, brokerage, and other investment accounts (401k, HSA, etc.) and itemizes income and expenses in one spreadsheet. Further, Mint allowed me to set budgets for specific expenses and receive notifications when approaching or exceeding those budgets. Once I added my missing accounts to Mint, my tracking system was in place, and I could begin auditing my expenses (Step 2). If you are comfortable with an online tracking system, Mint is an excellent and free place to start.


If you don’t have a way to track spending at all (no debit or credit card, no receipt system for cash), then start by either signing up for a checking account with a debit card or instituting a record-keeping system for your cash purchases. Evernote (paid) and OneNote (free) allow you to scan receipts with your phone and convert them to searchable text if you want to track receipts but don’t have space for paper.

Automation vs. Security – There is no truly secure way of managing finances. If I keep everything in cash, my cash could be physically stolen. If I manage all of my accounts online, my passwords could be hacked and my funds electronically stolen. Since I’m at risk either way, I’d rather accept the risk that simplifies my process and manage funds electronically. However, hacking is a real and serious threat and you should consider all available options and risks before signing up for an automated tracking service.


If you already have an effective tracking system, great! If not:

  1. Identify all of your income and investment sources: checking accounts, brokerage accounts, 401ks, IRAs, etc. Reviewing sources of wage, interest, and capital gains income from your prior year’s tax return is a good start.
  2. Identify all of your spending sources: credit cards, debit cards, checking accounts, Paypal, etc.
  3. Choose an automated or paper tracking system.
  4. Accurately track income vs. expenses for one month. Do you know exactly what you’ve earned and spent? Can you easily follow your system for another month?


Why I’m not allowed to manage money

I moved back into Washington, DC in July. Since I downsized from a 1 bedroom to a studio, I’ve been selling, donating, and depositing items in the Bermuda Triangle outside my building to get more space. The more I go through my stuff, the more I realize that (a) most of it is crap, and (b) I wish I never bought it in the first place. Highlights from junk pile are:

  • Rice cooker (paid $120 retail), I rarely cook rice
  • Fishing reel (paid $120 retail), I lost the rod that goes with it
  • Hand exerciser ($15 retail), why?

I don’t remember most of these purchases or why they made them. I definitely haven’t improved my decision making over time. Looking around my apartment, here’s a list of of junk I’m keeping:

  • A keyboard I never use ($500 retail), I promise I’m going to start practicing tomorrow
  • Fly-fishing equipment ($300), it was too hot this summer and now it’s too cold
  • A top of the line ironing board I rarely use ($100), I hate ironing

At the time of purchase, all of these expenses seemed like a good deal, an investment in myself, or a way to save money over time. However, if any of those things were true, I probably wouldn’t have an apartment full of junk.

So, if I know I’m a terrible decision maker, how should I manage my time and finances? For me, the best money management system is one where me and other people are least involved as possible because:

  1. I choose to make terrible purchases and investments for irrational reasons and justify them after the fact
  2. Other people also choose to make terrible purchases and investments for irrational reasons and justify them after the fact
  3. The probability of success is multiplied every time a human decision is removed from my money management system
  4. The system must support a minimal amount of waste (stupid purchases) to placate me to the point that I won’t try to screw it up

Therefore my optimal financial system is:

  1. Simple,
  2. Automated, and
  3. Has enough margin of error for inevitable mistakes

The next series of posts will provide a guide for creating a simple system that tracks and automates finances to achieve specific goals for reducing debt, investing, or making large purchases.