Three Facts About Personal Finance

Fact:  Kids think they know everything.  Also fact:  I know more than them.

If you teach for long enough and spend as much time around kids(not my own) as I have, you hear some real doozies when it comes to what kids think is true.  Everything from money coming from a “higher power” to what teachers actually do on their summer vacation.  Well the world of personal finance is no exception.  Here are three facts about personal finance and an explanation to clear up any misconceptions:

Fact #1:  Being In A Tax Bracket Does Not Mean All of Your Money is Taxed at That Percentage

Your at a party or gathering and someone inevitably starts going on and on about how they moved into a higher tax bracket.  Step 1:  Leave immediately!  But if you must stay because you got stranded in Long Island like Jerry and Elaine, you will be well equipped to participate in the dialogue after reading this.

These tax brackets they are referring to are the federal income tax brackets, which provide a range of incomes taxed at a given rate.  In the United States, we have what is called a Progressive Tax system.  It taxes your highest earning dollars at a higher rate than your lowest earning dollars.  For all examples to follow, we will use someone with taxable income of $75,000.

As you can see in the chart below, this person’s lowest earning dollars($0-$9,275) with be taxed at a 10% rate.  Their next highest earning dollars($9,275-$37,650) are taxed at 15%.  And so on…

Screen Shot 2016-01-10 at 9.44.08 PM

Tax Brackets v Average Tax Rate

Your tax bracket is the percentage on which your highest earning dollars are taxed.  So, someone who has a taxable income of $75,000 would be in the 25% tax bracket.  What that doesn’t mean is that they pay 25% in federal income tax.

Compare that 25% to their average tax rate, which is your tax in dollars as a percentage of your income:

Screen Shot 2016-01-10 at 9.51.58 PM

While someone may be in the 25% tax bracket, they are actually paying less than that percentage.

So the next time you are at your party or gathering, feel free to chime in and drop some tax bracket knowledge.

Fact #2:  The Minimum Deposit to Open a Checking or Savings Account is Useless

I hear it all the time.  “For as little as…” and insert some business promotion.  Well we can now add commercial banks to that.

Let’s use Chase Bank as an example(Small disclaimer here:  I am a Chase customer for multiple banking services and am very pleased with their service.)  They advertise that you can open a Chase Savings account for a deposit of only $25.  Sign me up! However, buried in all the benefits of the account is the caveat that you need to maintain a minimum daily balance of $300.  What the…?  If you don’t, you will be charged a monthly service fee* of $5.  So if you are looking for a way to lose $25, open a savings account with Chase, do nothing and five months later you will have donated your money to Chase.

*Chase provides you with ways to avoid paying this fee, which you can read about here.

Fact #3:  Whether You Choose Debit or Credit, The Money Comes From the Same Place

You run into Walgreens to buy something frivolous.  You’ve got your debit card in hand and are ready to make a quick and speedy check out, hoping no one you know sees you buying a gallon of ice cream at 9:30 at night.  You swipe your card and then comes the dreaded question:  debit or credit?  Huh?  What?  I never took accounting!  I don’t have a credit card!  Is that my neighbor?

Have no fear.  The answer is quite simple:

  1. No matter which option you choose, the money comes from the same place, your checking account.  So no, you didn’t sign up for a credit card with out knowing.
  2. The difference lies is when the money is withdrawn.  If you choose debit, you will have to enter your PIN, which will classify it as an “on-line” transaction that will occur in real time.  Translation?  The money will be withdrawn IMMEDIATELY!  With using a debit card as credit, it’s an offline transaction.  The funds for offline transactions are deducted after the merchant settles the purchase with the credit card processor and typically take 2-3 days(usually sooner**) to be reflected in your account balance.

**Another small disclaimer:  I have run tests with my own checking account and have seen a “credit” transaction withdrawn in a little as hours time.  I do not condone this method as a way to pay for things before the money is in your account.

If you have questions about anything you have read, or are looking for some more personal finance conversation, please feel free to email me at any time.

Thanks for reading!