Money Progress

Last year I used TurboTax Online to do my taxes.  They have a free edition that works well if you have a simple tax return.  I used them out of habit from helping my mother who uses the boxed TurboTax edition every year.  I was surprised that it was just as easy to use and as graphically friendly as what I was used to with the boxed copy.

This year my return is a bit more complex.  As I mentioned in my last post, I’ve had some losses in the stock market this year, some of which were in non-retirement accounts.  This means I get to claim short term capital gains losses!  Such a claim requires filling out a Schedule D form, which the TurboTax free edition doesn’t support.

As I was looking around for a fully functional free alternative I found TaxACT.  They have a free version that you can use online just like TurboTax, but that supports all the tax forms rather than a limited subset.  You have to put up with quite a few prompts to update to one of their paid versions but they are easy enough to skip by.  Overall the quality seems very similar to TurboTax.

I actually started my return with them a month or two ago but I couldn’t complete it as I had to wait for some straggling tax documents to come in the mail.  I logged back in last night to finish and ended up filing my return.  The whole process probably took me about two hours (including the time I spent a few months ago.)  Most of that time was just me tracking down my tax documents from various banks and investments.

As a result of filing I’ve now got an email in my inbox that says to expect my tax refund to be deposited into my account within 2-3 weeks!  The funny thing is that the money the government will be sending me isn’t really a tax refund, it’s my 2008 economic stimulus payment.  They mailed the checks based on 2007 returns, but I did not qualify then.  Since I do qualify based on my 2008 return, I now get the money.  Without it, I would have actually owed taxes since I try to keep my paycheck withholdings to a minimum so that I’m not overpaying taxes during the year.

There are probably other good alternatives out there besides TaxACT, but I felt like posting because it was a very painless and free process!  If you know of other free options that have full functionality and are easy to use, let me know!

You may have noticed that I didn’t mention anything about state income taxes.  This is because I live in the great state of Texas!  If you live in an inferior state (just kidding… you know us proud Texans) then you might have to do some more research on whether or not TaxACT’s state offerings are a good deal.  It looks like the cheapest you can get away with on their site is $14.

And now for one last snippet.  Did you know that only seven states don’t have an income tax?  I was very surprised when I looked it up.  I would have thought it was split more evenly.  I probably wouldn’t be so surprised if I grew up in a state with income tax, however.

The recent downturn in the economy has caused many people to question their investments, including myself.  Here is a short summary of my background.  I graduated from university with a bachelor’s degree just over a year ago.  Since then, I have been in the “working world” getting paid a salary for my work week, just like many others.  Thanks to graduating with no debt and keeping my living expenses low, I was able to start investing some money within just a few months of working full-time.  In hindsight I wouldn’t have started investing so early, but that is what I did.

I started a 401k and also fully funded a Roth IRA for 2007 since I had enough income as an intern for that year.  By September I also fully funded my Roth IRA for 2008.  All in all, I had invested $12,000+ in a fairly short amount of time.  Most of this money was in stocks, as is suggested for someone my age who is investing for retirement.  I also “diversified” by investing $3,000 in Vanguard’s Total International Stock Index in a non-retirement account.

We all know what happened next, the stock market dropped severely.  Here are a few pictures to illustrate.  The first is from Yodlee MoneyCenter and the second from Vanguard.

The large jump in the Roth IRA just before the crash is a 401k rollover from changing jobs and a transfer from my non-retirement account.

On October 10th I decided I didn’t want to risk losing more than I already had and I transferred 90% of my Roth IRA from the Vanguard Target Retirement 2050 fund to their money market fund.  Since then I have added to the risk by adding some bonds to the mix.

This type of investment change is exactly what most experts and advisers would say not to do.  I just bought high and sold low!  Well, it was at this point that I decided my cash savings was not sufficient enough to have this much money invested in stocks.  One of the reasons I was so aggressive in contributing to the Roth IRA is because I knew I could always withdraw the contributions tax-free if I had an emergency and really needed the money.

Since the crash, the only money I’ve invested in stocks has been in my 401k.  You might notice that the curve on the purple line that represents this above is getting a bit flatter.  That is because I’ve been steadily lowering my contribution percentage to the 401k.  I have decided that I would much rather have cash in savings rather than money invested in anything with a large downside risk at the moment.

The reason for my new found desire for a large cash savings is two fold.  First, I think that an emergency fund with 12 months of living expenses is probably not a bad idea.  With unemployment climbing it seems fairly reasonable to have a fund of this size rather than the more commonly suggested 3 months or 6 months.  My other justification for hoarding cash is actually representative of my new investment strategy.

This new investment strategy is the thought that perhaps I should be investing in myself instead of others. I’ll expand on this more in future posts, but it is a thought that has been guiding many of my recent decisions.  The traditional thinking might be that putting away money early for my retirement in stocks and bonds is investing in myself and my future.  However, that doesn’t ring entirely true.  I am investing for my future in this way, but I am actually investing my money in hopes that others will make financial progress and increase their value.  In that sense, I am not investing in myself.

I have not decided to do anything radical, but this thought will shape my investments in the future.  I plan on continuing traditional investments in stocks and bonds once I decide I have enough of an emergency fund, but probably in a reduced capacity.  Therefore on this site I will write some about these traditional investment methods, but I am also very interested in exploring alternatives.  Right now the main alternative I am considering is saving money to invest in a business of my own, rather than investing in other people’s businesses.

Feel free to post any thoughts in a comment below!

I spend so much time reading other finance blogs that I figured I might as well start my own.  I don’t have any grand plan yet, just going to see what comes to mind to write about.  One thing I intend on doing is to track my net worth in great detail to show the progress of my financial life, hence the name of the blog!

I may get started with some random entries on whatever comes to mind or responses to other blogs that inspire me to write.