Credit Card Debt

For easy reference, all credit score and credit report information is now available in one place:

High-interest debt is a truly hideous thing.  If "compound interest is the most powerful force in the world," as Einstein is rumored (1) to have said, then the last thing you want is for compound interest to be working against you.  If you carry a balance on a credit card instead of paying it in full, things can get pretty bad.

How bad?  This bad:


Simulating Historical Investment Returns

All investors must keep in mind that historical returns do not guarantee future returns.  However, the past is often a useful place to look to get some sense of what to expect in the future.  This article shows quantitatively that long-term, annualized, inflation-adjusted returns on the US stock market during periods from 1950 to the present have been approximately as follows:

40 years - - - - - - - (5.0 to 7.5%)
35 years - - - - - - - (5.0 to 7.0%)
30 years - - - - - - - (4.0 to 8.5%)
25 years - - - - - - - (3.0 to 11.5%)
20 years - - - - - - - (1.5 to 13.0%)
15 years - - - - - - - (-1.0 to 14.5%)
10 years - - - - - - - (-3.5 to 16.0%)

And here's the graphical representation of the data, where each color is a different starting year, the x-axis is the number of years invested, and the y-axis is the annualized, inflation-adjusted rate of return:

Play with the original graph here


ETFs: Investing With $100

The Excuse: Fund Minimums

"Fund minimums are too high - I can't afford that."  This is a very common excuse I hear when I ask my peers why, instruction manual in hand, they haven't started investing yet.

It's true: many mutual funds require minimal initial investments of thousands of dollars.  Most Vanguard index mutual funds require $3,000 to get started, and the lowest-minimum Vanguard Target Retirement funds still require $1,000.  After the initial investment, additional automatic investments can be as small as $50.  For this reason, I typically recommend budgeting to save that $1000 minimum over several months, making the initial investment, then setting up automatic monthly investments at whatever level you can afford.

If you'd like to get started immediately and you're willing to do a little extra manual work, there is another option that maintains the advantages of an index mutual fund -  low expense ratios and broad diversification - while allowing you to invest in $50-100 increments.


Ethical Investing

Out of disgust for companies that wield their considerable power irresponsibly, some environmentally- and socially-conscious investors avoid the stock market entirely.  As I explain in a previous article, this strategy is a poor one as you really can't afford to avoid market risk entirely.

Investing for the ethically-inclined (X1)
What's an ethically-concerned investor to do?  You could certainly perform your own due diligence on each company you would like to invest in and then purchase individual stocks, but this is hardly feasible for someone working a full-time job.  The process is extremely work-intensive, may incur significant transaction fees, will suffer increased volatility, and is very likely to fail to beat the market's overall returns.  Fortunately, there is another option: social index mutual funds.

Graduate Students, Roth IRAs, and 529 Plans

||  This article is part of a series on the 529 Education Savings Plan  ||

In school? You have options! (X1)
It is a shame that graduate students - a group who could very much use the opportunity to avoid falling behind their better-paid peers in saving and investing - are very often ineligible to contribute to a Roth IRA.

However, all is not lost!  Some graduate students are made eligible by other sources of income, and all graduate students can engineer around the problem with another qualified savings and investment option: the 529 Plan.


IRA Contribution Deadline

If you had earned income in 2012 and you'd like to make an IRA contribution on that tax year, it's not too late!  You can make IRA contributions to the previous tax year up through April 15th of the following year, the day that tax forms are typically due.

Already filed your taxes?  There are no tax consequences if you contribute to a Roth IRA, so you can still contribute toward last year's contribution limits without amending your tax return.

See Morningstar's full review here
Vanguard's Target Retirement Funds were awarded a gold rating last month by Morningstar (1), a leading investment analysis firm.  As discussed in my Roth IRA introduction, you can build a balanced portfolio simply by investing in one of these funds - they hold a balanced mix of Vanguard's highest-rated domestic stock, international stock, and bond market index funds.

The minimum initial investment is $1000 and the additional investment limit is only $100, so you can put some money in now and set up automatic monthly investments for only a $3.33 a day.  If $3.33 is still too steep, you can configure automatic investments to only occur every other month ($1.67/day) or once per quarter ($0.83).

Budget this - it's critically important.


Non-QWERTY Keyboard Layouts


QWERTY is not the final word on keyboard layouts!

The standard English QWERTY layout is rather poorly designed.  When one looks at the letters in the 'Home Row' (A-S-D-F-J-K-L-;), it's probably not too hard to believe that less than one-third of your typing is going to take place on these keys.  This is significant, because these are the key that do not require you to move your fingers to strike them!  The result is that the English typing speed is significantly slower than it could be, if the keyboard had been organized to put the most-used keys on the Home Row.  This layout is purely an historical artifact, and was designed to conform to the needs of 1890's typewriter technology, which would often jam if two adjacent keys were struck in rapid succession (1).

The Turkish Layout

The best example of a keyboard that actually makes sense is probably the Turkish layout:

The language uses the Turkish Latin alphabet, and therefore requires its own dedicated keyboard.  The layout was developed in collaboration with the Turkish Language Institute with the goals of maximizing use of the Home Row, locating the other often-used keys in places that are anatomically easiest and fastest to strike, and evenly distributing the typing load between the left and right hands.  These design criteria have resulted in the most efficient keyboard layout to-date; the fastest Turkish typists regularly outpace the fastest typists in the rest of the world (2).

The Dvorak Layout

The English-language user has not been left out!  The Dvorak layout, named after inventor August Dvorak and commonly known as the American Simplified Layout (ASK), has sought to correct some of the issues with the standard English QWERTY layout (3).  The Home Row (A-O-E-U-H-T-N-S) actually makes sense, and maximum typing speed is increased.  The Dvorak layout is standard enough that it comes installed with most modern operating systems, so making the layout switch is fairly straightforward.  The downside?  You have to learn it, which takes time.  Websites like Dvorak Keyboard Training provide interactive practice to get you moving in the right direction (4).

The German Layout

What if you're learning another language?  You have several options: learning the obnoxious Unicode input codes, settling for 'ss' and 'ae' when you really mean ß and ä, or... changing your keyboard layout.  There are very many keyboard layouts currently available, so it's just a matter of figuring out exactly what you're looking for and changing some operating system settings (you do NOT need to buy a new keyboard!).

Take the standard German layout, for instance: it is based on the English QWERTY, but with Y and Z switched and quite a few changes to the locations of the symbols and other miscellaneous things.  It includes the German-specific characters (Ö-Ä-Ü-ß) and an increased number of dead keys (keys that change the function of the other keys, like SHIFT).  There are two dead keys for accented characters (á, ê, í); while these characters aren't actually used in Germany, a European German user is very likely to deal with Spanish, French, and other languages that do.  Not surprisingly, this layout comes standard with all operating systems.  Making the switch to another language's layout is very straightforward - Google search for 'keyboard layout switch' and the name of your operating system.  See this guide for the switch to the German layout in MacOS, and Windows (5); in Ubuntu Linux, go to "System Settings > Keyboard > Layout Settings" and configure away.

...but I just said that QWERTY (or QWERTZ in this case) is slow!  Never fear; the Neo Users Group has created the German equivalent to the Dvorak layout (6).  This doesn't ship with most operating systems, but installation is pretty straightforward if you follow the directions on their website.  If you use Ubuntu Linux, German Dvorak comes standard!

(Can't read the website?  ...if you don't know German, why are you trying to install a modified German keyboard layout?)

Rapidly Switching Layouts

Most modern operating systems allow you to rapidly switch between the keyboard layouts you have installed by pressing a hotkey combination or clicking an icon.  In Windows 7, for instance, you can rapidly switch between multiple input languages and keyboard layouts by hitting Alt-Shift (you can customize this) or by clicking on the little icons that appear in the system taskbar:

Ubuntu Linux switches between the layouts you've selected when you hit Shift-CapsLock by default, but you can customize this too.

Do you have any experience with alternative keyboard layouts?  Do you think keyboard layout makes a difference to typing speed?  Would you be willing to try a new layout?  Comment!

(1) http://en.wikipedia.org/wiki/QWERTY
(2) http://en.wikipedia.org/wiki/Keyboard_layout#Turkish_.28F-keyboard.29
(3) http://en.wikipedia.org/wiki/Dvorak_Simplified_Keyboard
(4) http://learn.dvorak.nl/
(5) http://www.aufgehts.com/sup_Germankeyboard.html
(6) http://www.neo-layout.org/


Giving - Or Getting - The Gift of an IRA

A little gift box! (X1)

Executive Summary

You can give a lot of money away over your lifetime without triggering any gift taxes.  A donor can use this to help contribute to a wage-earning donee's Roth IRA with little hassle and no extra tax forms.


Have a relative or mentor who might be interested in making an extremely long-term investment in your future?  If you can convince them it's a good idea, it's completely legal for them to finance your IRA contributions all the way up to your annual contribution limit (as described in my Roth IRA investment introduction).

On the other side of the equation and have a relative or mentee you'd like to introduce to the importance of long-term savings and investment?  Helping them to contribute to an IRA could be the perfect opportunity.  Perhaps you can think of a clever way to incentivize their retirement savings plan contributions with your own version of 'corporate matching', teaching them several important concepts at once!  As long as they have earned income (i.e. they're issued a Form W-2 by the employer), there's no minimum age requirement for opening an IRA.

Gift Tax Rules

If these contributions are made to a Roth IRA, they'll have no tax consequences for the gift-giver or the gift receiver.  Under current tax law, any individual can give away up to $14,000 per person per year - the 'gift tax annual exclusion' - to an unlimited number of people without even reporting it (1).  A married couple can each give $14,000 per person per year.

The Lifetime Exemption

What happens if you gift beyond the annual exclusion limit?  You must report this on IRS Form 709 and you may owe taxes (2,3).  The key points (4,5):
  1. While you must report the entire amount of the gift to the IRS, only the amount over the Annual Exclusion is considered for taxation.
  2. In addition to the Annual Exclusion, all individuals also have a Gift Tax Lifetime Exemption - currently $5,250,000 in 2013.
  3. Each time you gift more than the Annual Exclusion, the value of the gift over the Annual Exclusion is subtracted from the Lifetime Exemption.
  4. You are exempt from gift taxes until you have depleted your entire Lifetime Exemption.
  5. At death, your estate's assets up to the value of your remaining Lifetime Exemption (and the remaining Lifetime Exemption of your spouse) is exempted from federal estate taxes.
The Tax Reform Act of 1976 merged the gift and estate tax exclusions, but they were separated in 2001 as part of George W. Bush's plan to completely repeal the estate tax by 2010 (6).  The gift and estate tax rates were re-unified at a maximum rate of 40% by President Obama's American Taxpayer Relief Act of 2012 (7).  See an infographic of historical estate tax rates in my previous post on the topic.

(1) 2013 Gift Taxes - http://www.irs.gov/uac/2013-Inflation-Adjustments-to-Various-Tax-Benefits
(2) IRS Form 709 - http://www.irs.gov/pub/irs-pdf/f709.pdf
(3) IRS Form 709, Instructions - http://www.irs.gov/pub/irs-pdf/i709.pdf
(4) Gift Tax Exemption - http://wills.about.com/od/understandingestatetaxes/a/gift-tax-chart.htm
(5) Wikipedia: Estate Tax in the US - http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
(6) IRS, Historical Overview of the Estate Tax - http://www.irs.gov/pub/irs-soi/ninetyestate.pdf
(7) American Taxpayer Relief Act: http://en.wikipedia.org/wiki/American_Taxpayer_Relief_Act_of_2012
(X1) Gift graphic: http://openclipart.org/detail/36991/cadeau-by-antoine


Historical US Estate Taxes

With the exception of death and taxes, nothing in life is certain.  If in life you accumulate some substantial assets (real estate, a business, savings and investments) and you live in a country that levies an estate tax, the former may trigger more of the latter!

Estate taxes are levied on the total current value of all of the junk you leave behind.  Anything you leave to a nonprofit organization or to your spouse is exempt, and there are additional rules to protect family businesses, farms, and the like.

Digging back through seventy years of Congressional tax reform records (1), I was able to reconstruct the historical estate tax rates, brackets, and exemptions back through 1942 (2).  I used a dizzying array of spreadsheet functions to correct for inflation and generate this graphic of historical effective tax rates:
US historical estate tax rates. y-axis is year (2013 on top); x-axis is estate size ($0-127,000,000); each color is 8%
The scale on this graphic is truly massive, including the effective tax rates of estate sizes up to $127 million on the far right.  I considered using a log scale, but I wanted to stick to a linear scale to make this graph comparable with my Historical US Income Tax infographic.

The top estate tax rate from 1947-1976 was 77%; the top rate dropped to 55% for most of the 1980's and 1990's and now sits at 40%.  Meanwhile, the inflation-adjusted estate tax exemption limit - the estate size on which no taxes are paid - has risen substantially:
Estate tax effective rate declines began with Reagan's Economic Recovery Act (ERTA) of 1981 (3) and continued with George W. Bush's Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 (4).  EGTRRA contained provisions that phased out the estate tax between 2001-2009, ending in the complete repeal of estate tax in 2010.  The estate tax was repealed in 2010, only to be reinstated in Obama's Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA) of 2010 (5).

(1) http://en.wikipedia.org/wiki/Category:United_States_federal_taxation_legislation
(2) https://docs.google.com/spreadsheet/ccc?key=0AiEk9zzYZVLgdDRBcEE1dndoVGVQWDZBVjduNmV2UlE#gid=4
(3) http://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981
(4) http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_Reconciliation_Act_of_2001
(5) http://en.wikipedia.org/wiki/Tax_Relief,_Unemployment_Insurance_Reauthorization,_and_Job_Creation_Act_of_2010


History Lesson: Open Source Office Software

There are many open source office productivity suites to choose from, though several of these options are actually forks of one another.  To add to the confusion, the crowd favorite suite was recently deposed and a number of projects were discontinued and re-merged.  Untangle the mess with a bit of history!
  1. OpenOffice is (was, briefly, maybe?) dead; long live LibreOffice
  2. If you use Linux, install LibreOffice
  3. If you use Windows, install LibreOffice
  4. If you use MacOS, try LibreOffice and NeoOffice
LibreOffice recently released v4 - even if your Linux distribution shipped with v3, check it out at libreoffice.org!