Archive for the ‘Question of the Day’ Category

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How much can you legally deduct on your taxes for charitable contributions?

Monday, October 5th, 2009

While tax laws are pretty complicated, there are still some general limits on charitable tax deductions. These limits only apply if you are donating a significant amount – more than 20% of your adjusted gross income (AGI). If you are not donating more than this amount in a year, then deduct away!

Once you reach the 20% threshold though, you should know the different limits on tax deductions that come into play. You can’t deduct more than 50% of your adjusted gross income (AGI) for cash donations, 30% for property, and 20% for assets. If you go over your limit for one year, you can roll the deductions out overthe next five years – and hopefully you’ll be able to deduct it all.

Is it OK to buy stuff online with your credit card?

Monday, October 5th, 2009

Shopping online is wonderful. You can shop in your pajamas, you can compare prices without going all over town, and you have virtually every store to choose from. However, many people are still worried about the safety of buying online. Fortunately, online stores have realized this and taken steps to ensure your credit card information stays safe.

You should never simply trust a website because it is a well-known brand. Check the bottom of the page to see what type of security the website uses. Here are several tips to keep your sensitive information to yourself:

  • Use a credit card instead of a debit card when shopping online. Many credit card companies offer full fraud protection that keep you from being responsible for any fraudulent purchases. There are also pre-paid credit cards that you can get rid of once you’ve used up the balance. These cards aren’t linked to any of your account or personal information, and they make it hard for thieving hackers to steal a lot of money from you.
  • One easy way to check the security of the website is to look closely the URL. When you are entering sensitive information, the URL should always be https:// instead of http:// which ensures it is secure.
  • Lastly, it is important to shop at your own computer and not on a public one. Public computers could be infected with spyware and any information you enter could be captured by hackers.

It is important to constantly keep up to date with latest security features to make sure you are taking the correct precautions when purchasing online but following these tips is a first step to ensuring your sensitive informations stays safe.

What’s with all the yelling and hand signals?

Monday, October 5th, 2009

You’ve seen it in movies: the guys in suits yelling and screaming, making hand signals reminiscent of those on a baseball field. So what’s all the yelling about? It’s called “open outcry” and it’s a method brokers use on trading floors to verbally make bids and offers. Palms up and out means sell. Palms in and up means buy. One set of fingers is used for numbers 1-5. Turn the other hand on its side and those fingers become 6-10. For 1-9, touch your chin. For blocks of 10, touch your forehead. For blocks of 100, make a fist and touch your forehead. And so on, whew!

As trading moves from physical floors to the electronic exchanges, open outcry is becoming obsolete. Many support this shift, citing electronic trading as faster, cheaper, and more efficient. On the other hand, many brokers insist face-to-face trades allow them to be more strategic in their executions, especially due to the cues they take from open outcries, whatever they are – hands up, palms out, high five! Fist to the sky!

What’s the difference between a regular bond and a junk bond?

Friday, October 2nd, 2009

“Junk” bonds are considered higher risk and lower quality than other bonds. Because of this, they promise a higher interest rate than normal. So, the higher rate gives you the possibility of higher returns but it also comes with a greater risk of default.

Junk bonds get the name “junk” from their low bond credit ratings. Companies like Standard & Poor’s and Moody’s Investors Service rate bonds to measure their riskiness – the lower the risk, the higher the quality, and vice versa. S&P’s “AAA” or Moody’s “Aaa” are the highest ratings a bond can get. Highly rated bonds are called investment grade. Anything below BB or Bb is deemed junk.

Should you buy or lease your car?

Friday, October 2nd, 2009

Everyone who is looking to buy a car asks themselves this question, however there is no one right answer. Examining your particular financial situation will allow you to make the right choice between leasing and buying.

When you lease a car, you’re basically borrowing it for an extended period of time and paying for the change in that car’s value from when you first lease to when you return it to the dealership. Let’s say you lease a brand new Honda Accord which sells for $20,000. You lease it for 36 months and when you return it, it is only worth $13,000. Your monthly payments therefore will reflect the depreciation (or the loss of value) of the car and that $7,000 in depreciation will be paid over the course of those 36 months you lease the car. Lease agreements usually come with warranties that allow you to get your car fixed for free, should there be a problem within the warranty period.

On the other hand, if you were to buy the $20,000 Accord outright, you would pay for the entire cost of the vehicle instead of just the depreciated value. The benefits of buying a car are complete ownership of the vehicle, ability to drive as many miles as you would like, ability to customize your vehicle, and lastly, the ability to easily sell or trade your car.

Ultimately, if you are able to afford higher monthly payments, buying a car is probably the best choice for you. But if you want lower monthly payments and new cars every two or three years, leasing a car may be a better option.

Can a check float?

Friday, September 25th, 2009

While checks do have to obey the laws of gravity, they’re in suspended animation in another sense. A check is basically an IOU. You write someone a check, he or she redeems that check later for cash, and the payment is taken out of your account. Credit cards work in much the same way – you pay for a purchase with your card, and the bill is charged to your account and paid later on.

“Float” is that period of time when a check or credit card charge is in limbo. It’s the time between the moment you write the check and the moment payment is actually received or the moment when a purchase is first charged to your credit card to the moment you pay that bill. During float, the check or credit card charge is, in a sense, suspended. It’s not really performing a function at the moment, but its existence represents a transaction that will have to happen sooner or later. Some people float checks in order to buy time until sufficient money to cover the check appears in their bank account. If this actually happens, great. But if not, the check will bounce and some nasty fees (from the bank and often from the recipient of the check) will start to pile up.

Hidden taxes?

Wednesday, September 23rd, 2009

You wouldn’t think you could pay taxes without knowing it, but it actually happens all the time. So-called hidden taxes are taxes on goods and services that you, the consumer, end up paying for. They’re taxes that are charged before the product or service can be purchased, and the seller just adjusts for the tax by hiking up his or her prices. So the government gets the tax money, the seller fixes things so he or she can turn the same profit, and the consumer faces a bigger price tag in the end.

You aren’t aware of hidden taxes because they’re indirect – they can take the form of import or export taxes, sales tax, excise duties, value added tax, and more. What’s more, indirect taxes can be a sneaky way for government officials to raise revenue: if they raise, say, income taxes, everyone notices and complains, but if they raise indirect taxes, people still end up paying more, but it tends to slip under their radar.

However, some people don’t like this practice because they argue indirect taxes aren’t progressive – that is, they don’t take ability-to-pay into account the way income taxes do. If prices for consumer goods go up, that price hike is usually small change for the very rich, but for less wealthy individuals, a price increase on goods they need can make a sizable dent in their budget. For example, an added standard import tax on coffee impacts everyone who drinks coffee, rich or poor. So even though indirect taxes aren’t illegal or even truly hidden (the sellers who have to pay them can certainly see them), some people still consider them a way to increase their tax burden behind their backs.

Why can’t you buy Cuban cigars in the States?

Wednesday, September 23rd, 2009

Currently in the U.S., it is illegal to buy, import, or sell cigars from Cuba. But, while cigars may be the most famous banned item, this law actually applies to any product from Cuba. The reason stems from a 1960 decision to impose a trade embargo on Cuba under President John F. Kennedy. The idea was to punish Cuba for hostile actions during the Cold War by denying it access to the enormous U.S. economy.

The embargo has been revised several times since its inception, but it hasn’t yet been lifted despite repeated calls for a free trade agreement from the business community. This embargo only applies to imports to the U.S., so American travelers will sometimes purchase Cuban cigars and other products in foreign countries and bring them back to America (although this is technically illegal).

What does it mean to say “the Fed is raising the interest rate?”

Wednesday, September 23rd, 2009

At any given time, there are countless different interest rates for countless different transactions at countless different institutions. The government doesn’t control all of them – how could it? But then how can you say the Fed has raised or lowered interest rates?

The Fed, or the Federal Reserve, is the whole country’s bank. It operates out of 12 different locations and it lands money to commercial banks, which in turn land money to us. The Federal Reserve Board is the agency that controls this bank and its job is to maintain a secure financial system throughout the country. The Fed’s primary concern is to regulate our economy’s rate of growth – if the economy grows too quickly, we get swamped by inflation, and if it grows too slowly, we could enter a recession.

Because the Fed lands money to all other banks, its interest rate affects all other interest rates, which adjust to accommodate the Fed’s behavior. So when the Fed decides the economy is growing too fast, it raises its own interest rate – raising all other interest rates in a kind of domino effect – and slows down spending that way. If the Fed wants to try to increase economic growth, it lowers its interest rate, which usually increases spending. While interest rates can vary from institution to institution, they’re all proportional to the country’s most important interest rate: the Federal Reserve’s.

Who picks the stocks that are in the Dow?

Wednesday, September 23rd, 2009

The Dow gets its name from Charles Dow, the man who first created it in 1897. In the beginning, Mr. Dow made a list of the 11 most prosperous and most widely traded stocks on the market. Currently, the Dow is made up of 30 stocks, chosen by the editors of the Wall Street Journal (which is owned by Dow Jones and Company).

But what are the criteria for determining what the “best” stocks are? The stocks included in the Dow are generally from large, stable companies that are considered to be among the most successful, but there is a mathematical formula to go on. The basic formula involves adding up the prices of all the stocks in a given index (collection of stocks) of a particular corporation, then dividing by the total number of stocks in that index – in other words, finding the average price of a stock for that index. Today, however, the editors at WSJ actually divide by a higher number in order to adjust for stock splits (when a company multiplies the amount of shares it has).

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