Would you trade your wedding ring for a car?

Would you trade your wedding ring for a new BMW? What about to rent out DisneyWorld for a day? What about to give your family enough food to live on for a week? I’m guess most people will say no, no, of course. The answer is pretty obvious. Your spouse would probably leave you right there if you traded your wing for a shiny toy or a day at DisneyWorld. But to feed your family? You would sacrifice anything to feed them. And maybe DisneyWorld is too good to pass up. The wife won’t notice a replica, right?

Would you pay $6,000 for a new BMW? What about to rent out DisneyWorld for a day? What about to give your family enough food to live on for a week? Who wouldn’t say yes to all 3? $6,000 is a great deal for a car and an insane deal to rent out DisneyWorld for a day. Personally, I’d feel really angry about having to pay $6,000 to feed my family for a week. I would feel ripped off and betrayed by whatever evil merchant would jack up the price so much.

The average cost of a wedding ring is around $6,000. So you’ll pay $6,000 for a wedding ring and pay $6,000 for a car, but won’t trade the wedding ring for a car.

This is illogical! But it’s how people work. A wedding ring is more than just a ring. It carries sentimental value with it. It represents the strength of the one you’re chosen as your life partner. To trade something like that for a car seems sad, cheap, and disrespectful. On the other hand, you likely value your family more than a ring. So if you have to, you’ll give it away in a heartbeat to save them. So why might you be willing to give $6,000 for a new car but will not give up your wedding ring worth $6,000?

Money has no value

That felt weird to write. But it’s true. Money doesn’t have any value at all. A credit card is just a number backed by a piece of paper. Nowadays, that paper is backed by…nothing. Money is a tool that we use to judge value. Objects have value. Services have value. Experiences have value. Money is the tool we use to handle the transfer of everything.

How can you use this to your advantage?

Take the other side! Find value where somebody else doesn’t see it.

Mr. Money Mustache hits the nail on the head with this tweet. He poses the question on whether or not it’s a good idea to buy a used Nissan leaf. In LA, they are going for $8,500 for a 2011 model. This was a $35,000 car! See it for yourself here. The perceived value of this car has dropped tremendously since the price of oil has dropped so dramatically. Lots of people see cheap gas and want to buy up the newest gas hog.

There is a deal to be made here.

  1. Gas is unlikely to stay this low forever.
  2. Electric cars are the way of the future.
  3. The same people selling these cars now are likely to be clamoring to sell their new gas guzzler if the price of gas does rise again.

Another example

Sell engagement rings! The sentimental value of a wedding ring makes it a terrible investment. The markup on engagement rings is horrendous. You’ll be lucky to get even 25% of the value. Since there is such bad value for the reseller, that means there is a great value for the original seller. Maybe it’s time to think outside of the box and take the other side.

If your spouse ever does ask you if you would sell your wedding ring, the real correct answer is to make a loud noise (to cause distraction) and RUN!

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Free Money – Jump the Tax Bracket Cliff

I’m a little bit of an adventure junkie. If you’re ever in Puerta Plata, definitely check out the Damajaqua Cascades (27 waterfalls). You’ll get to wade through a river with a natural formation of many waterfalls and cliffs carved out of the rock. The 40 ft jump is breathtaking!


What’s the only thing more exhilarating than actual cliff jumping? Jumping the metaphorical tax bracket cliff! Ok maybe not more exhilarating, but it’s a close second.

Jumping the tax bracket cliff

What do I mean by jumping the cliff? I’m talking about putting yourself in a lower marginal tax bracket. For 2015, the tax brackets can jump all the way from 10% up to 39.6%. Which would you rather pay? That’s what I thought. There are techniques you can do to reduce your taxable income now, some of which I outlined in the previous articles of this series. In order to maximize your net income, you must find every source of non-taxable income possible. As I’ve mentioned, you can get this from your Roth IRA and your Roth 401k!

Roth vs. AND Traditional

Common advice is to put money into your Roth while if you are in a low marginal tax bracket. This is great advice. If you’re in the 10% or 15% tax bracket and can afford to contribute to retirement, put money into a Roth. Of course the exception is if you need to use the traditional to capture the Saver’s Credit. And if you’re in the 39.6% tax bracket, it most likely makes sense to put that money into a traditional tax account so you don’t have to pay such a large tax bill right now.

But what about the rest? Those in the 25 – 33% tax brackets have a much higher risk of guessing their tax bill right in retirement. It’s hard to predict 30 years out! My rebuttal: why try to predict? Contribute to both a roth and a traditional if you can. And this might help you jump the tax bracket cliff now and when you retire?

Jump the cliff now

If you’re on the edge of a tax bracket and want to contribute to retirement, consider contributing enough in your traditional retirement account to bring you down to the next tax bracket. Put the rest of your retirement contributions into a Roth.


Anne makes $38,000 AGI a year as a single woman. She has wisely decided she wants to contribute $5,000 in her retirement fund. Since the tax bracket jumps from 15% to 25% at $36,901, she decides to contribute $1,100 into a traditional 401k and the rest into a Roth IRA. The traditional contribution brings her down to $36,900, right at the 15% tax bracket bump! This means that she captured an easy 10% spread on her $1,100 contribution, saving her $110.

Jump the cliff later

You can use the exact same method in retirement! If you have sizable Roth balances and Traditional balances, you can pick and choose how much you take in distributions. So you can withdraw enough of your taxable income to keep your taxed withdrawals in a lower tax bracket.


Anne is now 70 yrs old and has some pretty nice sized retirement accounts. She also gets $20,000 a year from social security. She wants to withdraw $30,000 from her retirement accounts per year for total income of $50,000 a year. The best way to do this using the tax brackets from the last example is to withdraw $16,900 from the traditional account and $13,100 from the tax free account. This keeps her in the 15% tax bracket. By structuring her withdrawls this way, she saves 10% of the $13,100 for a whopping $1,310.

That’s almost enough money to go cliff jumping for real.

How does Dr. PF use this?

When I had a Roth 401k available, I put a portion of my earnings into it every month. I stupidly didn’t contribute to a Roth IRA at all for several years. Now that I’ve passed the income bracket to contribute to a Roth and have too much money tied up in a Traditional IRA to do a Backdoor Roth, I don’t get to use this technique at all!

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Free Money – Saver’s Credit

Welcome to part 2 of the Free Money Retirement Series, the Saver’s Credit. If you don’t have a sky high income or your employer doesn’t offer a retirement match, then you’ll want to find out more about the Saver’s Credit below to earn up to $1,000 (or $2,000 if you’re married).

What is the Saver’s Credit

The Saver’s Credit is a tax credit introduced by the US government that essentially replaces the employer retirement match for lower-income employees. Depending on your AGI (adjusted gross income), you are eligible to earn up to $.50 for every dollar you contribute to an IRA or 401k up to $2,000 for a total of a $1,000 tax credit. Married couples can earn up to $.50 for every dollar up to $4,000 for a whopping $2,000 tax credit.

Can I get the credit?

As I mentioned before, there’s only a certain income level that can take full advantage of this tax credit. In 2015, singles can only earn $18,250 in adjusted gross income to get the full 50% credit. If you’re like me, you might think that number is extremely unfair. If seeing how low that number is upsets you, you’re likely in one of 2 categories.

  • You make under $18,250 a year. You might be asking yourself how on earth anyone could expect you to be able to save anything in a retirement fund. I can sympathize with you. I made $5.15 an hour for my first job only for my employer to hire me as a contractor so he wouldn’t have to pay social security taxes for me….at $5.15 an hour. For some reason, I stayed at that job for over a year. While it’s not easy to save on an income of under $20k, it may be possible. Keep current with School of Finance and you’re guaranteed to find some tips that will make it easier.
  • You make slightly above $18,250 a year. It must really grind your gears to work hard every day only to barely miss this free money threshold. If that’s you, then you can relax! There are 2 key things here to notice
    • Adjusted Gross Income. This is income calculated after certain deductions, including retirement deductions, student loan deductions, and alimony payments. So if you max out your Traditional 401k at $18,000, max out a traditional IRA at $5000 (though this isn’t necessarily the best idea) and pay $2500 in student loan interest, you could make $43,750 a year and still make only $18,250 according to the tax law. The rich aren’t the only ones that can use the tax law to their advantage!
    • Staged thresholds. Even if you can’t get the full 50% match, you might still be able to 20% or 10% if your income is under about $30,000. Using the above example, that means you could easily make over $50,000 a year and still get this credit! Maybe with some further deductions, you could even qualify for the earned income credit.

What’s my raise?

To sum things up, the government might give you free money just to contribute to a retirement plan! By the way, for those that do get an employer match, I’ve yet to see any documentation that forbids still taking this credit.

So what’s my effective raise I get by taking this credit? Let’s assume I make $20,000 a year. Using our handy tax calculator, we can see that I make about $1,435 a month. If I put $2,000 in an IRA, that knocks my taxable income down to $18,000. Running some numbers gives an approximate monthly income of about $1,530. This is a raise of $95 a month, which is a 6.6% raise. I know I would jump at that chance.

savers credit

The Downside

The government never likes to make things too easy. The downside to this credit is that you can’t withdraw your retirement contributions right away, or you’ll lose the credit. This means that in the above example, your standard income drops to $1,304 a month. This is different than employer sponsored matches. You’re free to withdraw that and simply pay a penalty as I highlighted in my previous article. So if you really need the money and just can’t find a way to contribute to retirement, save it for another day. Or you can keep reading School Of Finance for tips on how to both increase your income and reduce your expenses!

How does Dr. PF use this?

I don’t. Fortunately, my income is too high to take advantage of this. I would if I could!

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Free Money – Why You Should Always Use Your 401k Match

Welcome to Part one of the Free Money for retirement series, why you should always use your 401k match. A full 25% of employees that are eligible for an employer match don’t take advantage. If your employer matches a part of your retirement and you’re not using all of it, read on. You’ll want to change your plan the day after reading this article.

What is a 401k?

A 401k refers to the most commonly offered retirement plan in America. It is a plan that allows you to defer some of your compensation into an account that cannot be withdrawn from until you are 59.5. They come in two forms, a Traditional 401k or a Roth 401k. A Traditional 401k does not tax your earnings until you withdraw the money, typically after the age of 59.5. A Roth 401k taxes your earnings when you deposit your money, but not upon withdrawal. Learn more about the history of the 401k here.

What is the employer match?

An employer match is simply a contribution made by your employer to your retirement account. Most employers that offer a 410k retirement plan offer some form of matching. The most common forms of match are:

  • 50 cents of every dollar contributed by the employee up to a certain percentage. For example, a 50% match up to 6% of your salary for a total contribution of 3% of your salary.
  • 100 cents of every dollar contributed by the employee up to a certain percentage. For example, a 100% match up to 5% of your salary for a total contribution of 5% of your salary.
  • A flat dollar match. For example, a match of the first $4,000  of your contribution.

Hopefully something jumped out at you with that last bullet point. $4,000. It doesn’t sound like that much money when you see all these small percentages, but it sure does when you see $4,000. That’s equivalent to an extra $333 every month, more than an average car payment. If you can afford to do this, do it right now. But Dr. PF, what if I can’t afford it?

What If I can’t afford to contribute to my retirement?

If you think you can’t afford to contribute to retirement to get your employer match, then you can’t afford not to contribute. If you find yourself asking that question, then pay careful attention to this section.

Some people fear a 401k because of the penalties. The 401k plan enforces a 10% penalty on withdrawals on top of the taxes. When it comes to the employer match, do not fear the penalty! For one, those in some situations can make a hardship withdrawal with no penalty.

Even if you have to pay the penalty, it is still worth it to contribute enough to get the employer match. Let’s assume Bill makes $40,000 a year and has access to a retirement plan that matches 4% of contributions to a Traditional 401k. Bill stands to make $1,600 from employer contributions based on the 4% match. Bill contributes $1,600 of his own money in order to get the match. That’s a total contribution of $3,200. Now, assume that Bill does the unthinkable and withdraws every cent from the 401k without a hardship. Since Bill is single, he pays taxes of 25%, or $800. He also pays a 10% penalty fee of $320. That leaves him with $2080.

Now let’s assume Dave also make $40,000 a year and has access to a retirement plan that matches 4% of contributions to a Traditional 401k. Only Dave decides not to contribute at all to the 401k because he cannot afford it on his budget. So instead of contributing $1600 to the 401k, Dave just receives it in his paycheck. Of course, Dave is single and must pay 25% tax on this income, just like Dave, which totals $400. So Dave is left with $800.

What can do we see from this? Even after all the penalties, Bill receives $1,220 more than Dave just by contributing to his 401k. He doesn’t even keep the money in the 401k and he still makes an extra $100 a month after taxes! Using a handy tax calculator, we can see that the monthly take-home is roughly around $2,650 for a $40,000 salary. Bill has given himself a 3.7% raise over Dave just by contributing to his 401k, even though he took every cent out.

ChartGo (1)

What’s the takeaway

The takeaway is to always take advantage of a 401k match. There are no downsides! But Dr. PF, what if I don’t have a 401k match offered by my company? I’ll talk about that in the next part of this series.

How does Dr. PF use this?

Right now, I get a $4,000 dollar for dollar match from my company. I just about max out my 401k, so I take advantage of this every year! In fact, the dollar for dollar match is particularly good. I have received 100% of my employee match for the year by April or May. That’s 8 months that I get that money invested in my 401k funds instead of in the hands of my employer.

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Free Money – Retirement

Who doesn’t like free money? You would expect that everybody would take advantage of free money, but that’s not the case when it comes to retirement plans. According to recent information from the Bureau of Labor Statistics, only half of Americans are participating in a retirement plan from work.

Why? This graph from a CNBC article sums it up well.

Percentage of Workers participating in retirement plan at work.

Lower income, Part-time employees, and employees from small employers have a lower participation rate. Why? The common claim is “I can’t afford it.” If you find yourself in this situation, or even if you can afford to contribute but don’t, I’ll show you how to set up your future and earn yourself some free money along the way. In the coming days, I’ll post a series of articles that explain no matter what you’re situation is, you’re losing free money by not contributing to a retirement plan and how you can afford to contribute.

Part One – Why You Should Always Use Your 401k Match

A vast majority of employees have access to a 401k or similar retirement plan that has a matching program. Click here to see why you should always take advantage of it.

Part Two – The Saver’s Credit

If you’re one of those part-time, small employer, or low income employees don’t worry! You may still be able to get some money back in your taxes.

Part Three – Jump the Tax Bracket Cliff

Use the tax brackets to your advantage! If you can contribute to both Roth and Traditional retirements accounts, you might be able to create some flexibility with your income,.

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School of Finance

Have you ever seen School of Rock? As Dewey Finn says,

Those who can’t do, teach. And those who can’t teach, teach gym.

It’s up for debate how good I am at teaching gym (I was not a star dodgeball player), but we at School of Finance love and thrive on understanding how Personal Finance guides our daily lives. Money involves many parts of our lives. We work for money, we argue with our spouses about money, we roll our eyes when we hear the governments fiscal policy, and so much more! Learning how to master money will help you on your path to mastering yourself. School of Finance is about mastering money. We’ll discuss topics that are achievable by everyone. We’ll talk about budgeting, investing, relationships, careers, income, expenses, and everything in between.

Doctor PF has been an avid practitioner of Personal Finance for many years. He has worked in the finance industry for 4 years, but was born with Personal Finance bug! He’s also a technology geek and loves fitness in his spare time.

Where does School of Finance lie in the Personal Finance blogosphere? Smack dab in the middle of I Will Teach You To Be Rich and Mr. Money Mustache. A healthy financial lifestyle (just like every other lifestyle) involves learning how to live under the constrains of moderation. Moderation is our key theme. We’ll focus on striving to increase your income, yet learning the beauty of minimalism. We’ll write about concepts achievable by you, your mother, you coworkers, your uncles, and your cat. OK, maybe not your cat.

Freedom resides in the recognition of limitations. In knowing how far you’re able to reach, you’ll have perfect freedom to choose just how far within that range to reach. The ideal of unlimited freedom is an illusion. Maximum freedom is experienced when one is in the middle between the upper bound and lower bound limitations, in other words, moderation. Then one has the maximum range in which to alter his behavior. This is the Taoist ethic of freedom through moderation.

~ Quoted from www.taosim.net




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