Mutual Fund Cost Basis

The IRS rules for mutual fund cost basis reporting have changed effective January 1, 2012. Before 2012, investment companies were not required to report cost basis information to investors or the IRS when investors sold mutual fund shares. Investors were solely responsible for reporting their cost basis and capital gains to the IRS when they sold mutual fund shares. Investment companies that historically provided cost basis information did so at their own discretion. Now for the 2012 tax year and beyond, the IRS requires investment companies to report cost basis information to investors and the IRS when investors sell mutual fund shares. The cost basis reporting requirement only applies to mutual fund shares acquired on or after January 1, 2012. Investment companies are still not required to report cost basis information for mutual fund shares that investors acquired before 2012. The cost basis reporting also only applies to shares sold in taxable, non-retirement accounts because realized capital gains in retirement accounts are typically tax-deferred or tax-exempt.

Investors have three options for how their mutual fund cost basis will be reported. The average cost method assumes the cost of shares sold equals the average cost of all shares acquired by the investor. The first-in first-out method stipulates for the shares to be sold in the same order they were acquired by the investor. The specific identification method allows the investor to select which shares are sold regardless of when they were acquired. Investors are free to choose which cost basis method best suits their individual tax situation and even switch between the different methods with one exception. Investors who use or have used the average cost method to report capital gains or losses on mutual fund shares acquired before 2012 must continue to use the average cost method for all shares of that mutual fund acquired before 2012.

When investors sell mutual fund shares acquired before 2012, they are not required to decide on a cost basis method for those shares until they file their income tax returns because investment companies are not reporting the cost basis to the IRS. With that flexibility, investors can choose which cost basis method provides them the lowest tax burden after they have evaluated their entire tax situation for the year. That flexibility does not exist for mutual fund shares acquired in 2012 and beyond. When investors sell mutual fund shares acquired on or after January 1, 2012, they need to select their cost basis method before or at the time of sale so investment companies know which method to report to the IRS. Investors should be motivated to select their own cost basis method because an investment company's default reporting method may not provide the best tax advantage. Ultimately, the new cost basis reporting requirements should benefit investors as well as the IRS. Although more tax planning may now be required, fewer tax reporting errors should occur. Investment companies and investors are now cooperating parties in the calculation of mutual fund capital gains.

Index Fund Advantages

Mutual funds can be classified as either index funds or active funds. Index funds attempt to replicate the performance of a benchmark index by owning the same securities as the index in the same proportions as the index. Active funds attempt to perform better than a benchmark index by owning specific securities that may or may not be included in the index but are expected to perform better than the index as a whole. Both types of mutual funds have proponents who will argue their advantages. Three advantages of index funds are convenience, consistency, and cost-efficiency.

Index funds are very convenient for investors who prefer not to spend a lot of time and resources trying to determine which mutual funds to buy and sell. Investors decide which segments of the market they want own and then buy and hold index funds that track those segments. This eliminates the need to evaluate all the active fund offerings of multiple companies to select which fund might perform best in a category. Instead of analyzing mutual funds, index fund investors rely on the benefits of diversification and allocation. Diversification within a category is easy to achieve with index funds because they typically own most if not all of the securities that comprise a category. Rather than determining which categories to overweight or underweight, index fund investors can get market performance by simply allocating their portfolios to match the percentages each category represents of the overall market. Risk levels can be easily controlled by adjusting the allocations between stock index funds and bond index funds, and occasionally rebalancing among those index funds will allow investors to maintain their desired allocations.

Index funds consistently provide the average performance of a category because they always own a representative sample of all the securities in a category. The investment return of an index fund will resemble the aggregate return of all the securities that comprise that index. The securities owned by active funds may not fully represent the category, so their returns can be very different and inconsistent from the average returns of the category. When active funds in pursuit of better performance buy securities outside of their benchmark category, this changes the style and composition of the funds. Index funds are consistent in their style and composition because they will only own the securities that are included in the benchmark index. As a result, index funds have little risk of performing worse than their category benchmarks. Index funds appeal to investors who seek investment returns that are consistent with the returns of their targeted categories.

Index funds are cost-efficient because they do not require a lot of management labor. Index fund managers simply buy and hold shares of the securities that are included in the benchmark index. Active fund managers must research and monitor securities inside and outside of the index to determine which to buy and sell for their funds. The active fund managers ensure they are compensated for this additional work by charging higher expenses, thereby passing along extra costs to investors. In addition to higher fund expenses, investors may incur more tax costs with active funds. As active managers buy and sell multiple securities attempting to perform better than an index, they increase their funds' turnover ratios, which increases the frequency of realized capital gains. Index funds buy and hold the same securities as long as they are included in the index, so index funds typically have lower turnover ratios and fewer capital gains tax liabilities.

Index fund advocates follow a certain philosophy about investing. They believe active funds are inconvenient to analyze and monitor, inconsistent in composition and performance, and inefficient regarding costs. They believe the probability of an active fund performing better than a benchmark index does not warrant the acceptance of those disadvantages. They believe index funds are superior because they are convenient, consistent, low-cost investments, and maybe the biggest advantage of index funds is performance. Data from Standard & Poor's Index Versus Active scorecard shows index funds have historically performed better than a majority of their active fund peers.

When To Start Social Security Benefits

People who are eligible for Social Security retirement benefits may start receiving benefits anytime between ages 62 and 70. However, people who start receiving benefits before their full retirement age, which is 65 to 67 depending on year of birth, will see their monthly benefits permanently reduced, and people who delay receiving benefits past their full retirement age will see their monthly benefits permanently increased. This trade-off causes many people to question when is the optimal age to start receiving benefits. The following are a few aspects to consider before deciding when to start receiving Social Security retirement benefits.

Life Expectancy
Assuming everyone lives to the same age, people who begin receiving Social Security benefits at younger ages will collect a lower monthly benefit for more years, and people who begin receiving Social Security benefits at older ages will collect a higher monthly benefit for fewer years. While we know not everyone has the same life expectancy, the Social Security Administration (SSA) attempts to predict what the average age of death will be for people depending on their gender and current age. You can find the average life expectancy for a person of any age on the SSA website. The SSA considers the average life expectancy age to be the break-even point for the total lifetime benefits a person will receive. So theoretically, a person will have received the same total lifetime benefits at his or her life expectancy age, regardless of which age he or she began receiving benefits. People who feel they will live more or less years than the average life expectancy should let that influence their decision of when to start receiving benefits. People who will die before the average person their age may want to start receiving benefits at an earlier age, and people who will live longer than the average person their age may want to delay receiving benefits until a later age.

Investment Return
Once a person starts collecting a Social Security retirement benefit, that monthly benefit amount is locked in for life with an increase only for cost-of-living adjustments when determined by the SSA. For every month a person starts receiving Social Security benefits before his or her full retirement age, the benefit amount is reduced by a certain percentage, and for every month a person delays receiving Social Security benefits after his or her full retirement age, the benefit amount is increased by a certain percentage. You can find the percentage adjustment for a person of any age on the SSA website. The percentage increase or decrease may be considered favorable or unfavorable compared to a person's expected investment return. If the percentage increase or decrease of the monthly benefit is less than a person's investment return, he or she may may want to start receiving benefits at an earlier age and invest the benefits for a return greater than the SSA adjustment. If the percentage increase or decrease is more than a person's investment return, he or she may want to delay receiving benefits until a later age because the SSA adjustment will provide a greater return than investing the benefits.

Employment Status
People who are still working and earning income do not usually benefit from starting to receive Social Security benefits before their full retirement age. Not only do they receive a reduced benefit by starting at the earlier age, but the SSA imposes an additional penalty by reducing their monthly benefit by $1 for every $2 of income they earn above $14,160 per year (limit adjusts for inflation). People who are working often have higher incomes and higher marginal tax rates before retirement than they will have after retirement. Social Security benefits are counted as part of taxable income, so some people may not want to receive benefits during their working years when they are paying income taxes at higher marginal rates. In some cases, starting to receive benefits while continuing to work may push them into higher marginal tax brackets. The effect of income taxes on Social Security benefits should be evaluated in conjunction with a person's after-tax investment return. If income taxes suppress a person's net investment return to less than the percentage adjustment for delaying Social Security benefits, receiving later may be preferable to receiving early.

We cannot definitively determine the optimal age to start receiving Social Security retirement benefits because the decision is often based on multiple unknowns. We must make assumptions about life expectancies, investment returns, and income taxes. However, we do know the aspects to consider in the evaluation, and we use this information to guide us to the best decision we can make at the time.

Saving For Children

Personal finance experts emphasize the importance of starting to save at an early age. The power of compound interest can provide a huge financial advantage for people who begin saving for retirement several years sooner than their peers. Some of us have seen the calculations that show the difference between starting to save in your 20s versus your 30s and how the person who starts saving sooner has a larger account balance at retirement. Most people have reached their older years before they realize this benefit and then can only wish they had started saving sooner. While the benefit of starting to save early may have been missed by older people, they can still help their children benefit from a long time horizon. If starting to save just ten years sooner than your peers provides a large advantage, imagine the benefit of starting to save twenty or thirty years sooner. With some assistance from their families, children can benefit from the power of compound interest while also learning the valuable lesson of saving.

Assume you save $100 per month for your child from her birth to her age 18. If you invested the savings in a diversified stock market mutual fund, and it grows by 8% per year, the account balance would be $48,009 by her age 18. That would be a nice gift for college, but what if she leaves the money alone? If she does not touch the account for the next 47 years, no additions or withdrawals, and it continues to grow by 8% per year, the account balance would grow to $2,036,326 by her age 65. That nice gift for college turns into a nice nest egg for retirement.

In the above scenario, your child does not save any additional money to the account after her age 18. Now assume she continues saving $100 per month to the account after age 18, and it grows by 8% per year. In that case, the account balance would be $2,657,564 by her age 65. Although she continues to save for 47 additional years, the ending balance is only about 30% higher. That shows the true power of starting to save early. The first 18 years of saving produce a balance of $2,036,326, while the last 47 years of saving produce a balance of only $621,238. The reason is the earlier savings experience more years of compound interest growth.

Saving for your children's retirement may not be a priority, and you should not place that goal ahead of saving for your own retirement, but if you have the ability to invest for your children, they will thank you one day. Imagine if your parents had invested for you in the stock market back when you were a child and how much that investment might be worth today. You would be pleased, and your children would probably feel the same. Teach your children the concept of saving by getting them involved in the process. For example, if you want them to have an allowance of $10 per week, give them an allowance of $15 per week with the requirement they save $5 in an account so their net is still $10. This will teach them that they must always save a portion of the money they earn or receive. Children have the ability to learn the concept of saving at an early age, and parents who teach this to their children pass on a valuable life lesson.

Time And Risk

Investors want to receive the highest possible return with the lowest possible risk. However, the risk/reward trade-off principle says we cannot increase our potential return without increasing our exposure to risk. Is that always true? The risk/reward principle is usually applicable for short-term investments, but when we consider long-term investments, we can maximize potential return with minimal exposure to risk.

Consider the risk/reward principle in comparing a stock portfolio and a bond portfolio. In any one year, an all-stock portfolio has a higher potential return and a higher probability of loss than does an all-bond portfolio. Therefore, stocks are considered the higher risk/reward investment over a short time period. The applicability of the risk/reward principle depends the time horizon considered. When we evaluate the stock portfolio over a longer time horizon, the potential return increases and the probability of loss decreases.

Looking at the past 85 years of historical investment returns, from 1926 through 2010, we can see which time periods an all-stock portfolio performed better and which time periods an all-bond portfolio performed better. Considering all 5-year time periods from 1926 through 2010, stocks performed better than bonds in 70% of the 5-year periods. Considering all 15-year time periods, stocks performed better than bonds in 95% of the 15-year periods. Considering all 25-year time periods, stocks performed better than bonds in 100% of the 25-year periods.

The historical investment return data shows that as we extend the time horizon, the risk of a stock portfolio decreases because the probability of a higher return increases. That should be the focus for long-term investors. Do not worry about the daily volatility of a long-term investment. The ultimate goal of a long-term investment is to maximize return. In time periods of 25 years or longer, an all-stock portfolio has always produced a higher investment return than an all-bond portfolio. So if you are an investor with a long time horizon, investing in a stock portfolio should minimize your risk of inferior performance.

Overfunding Education with 529 Plans

The idea of saving too much for college may not seem like a big concern considering college costs are increasing at about double the rate of inflation. However, for families that use only 529 plans to save for future college costs, saving too much could cost them more than saving just enough. A 529 plan is a type of tax-advantaged account designed specially for college education savings. 529 plan contributions are not deductible for federal income taxes, but money contributed to the plan can grow tax-free, and withdrawals are tax-free if the money is used for education expenses. If the money from a withdrawal is not used for education expenses, the earnings portion of the withdrawal is taxed at ordinary income tax rates plus an additional ten percent penalty tax. That potential tax is an important reason why families should not save too much in 529 plans. Families should instead consider splitting their college education savings between 529 plans and regular, taxable accounts. Let's compare these strategies with a couple of examples.

The Martinez family wants to save enough for their infant daughter to attend an expensive private school at a future estimated cost of $200,000 for four years. The Martinez family saves $100,000 in a 529 plan for their infant daughter which grows to $200,000 by the time she graduates from high school. Once their daughter reaches college age, she decides to attend a more affordable public school that will cost $100,000 over four years. The Martinez family has $200,000 in their daughter's 529 plan but will use only half of that amount for her public college education. Therefore, half of the earnings in her 529 plan ($50,000) will be subject to ordinary income taxes and a ten percent penalty tax. So if the Martinez family is in the 25% federal income tax bracket, they will owe $17,500 in taxes on the half of earnings ($50,000 x 25%) + ($50,000 x 10%).

The Rodriguez family also wants to save enough for their infant son to attend an expensive private school at a future estimated cost of $200,000 for four years. The Rodriguez family saves $50,000 in a 529 plan and $50,000 in a regular, taxable account. The $50,000 in the 529 plan grows to $100,000, and the $50,000 in the taxable account grows to $100,000 by the time he graduates from high school. Once their son reaches college age, he also decides to attend a more affordable public school that will cost $100,000 over four years. The Rodriguez family withdraws the entire $100,000 from the 529 plan to pay their son's education expenses, and therefore, pay no income taxes on the earnings portion of the 529 withdrawal. They do not use the other $100,000 in the taxable account for education, but the earnings in the taxable account ($50,000) will be subject only to capital gains taxes. So if the Rodriguez family is in the 15% long-term capital gains tax bracket, they will owe $7,500 in taxes on the earnings ($50,000 x 15%).

In comparison of the two above scenarios, both families saved the same amounts and paid the same amounts for education, but they did not pay the same amounts of income taxes. The Martinez family paid $10,000 more in taxes than the Rodriguez family because they used only a 529 plan for education savings rather than splitting education savings between a 529 plan and a taxable account. The ideal way to save for college education is to use a 529 plan to save for the minimum education costs and use a taxable account to save for potential costs above the minimum. This strategy will help prevent the overfunding of a 529 plan while still saving an adequate total amount for education expenses. The 529 plan is a great tool in saving for college education costs, but the 529 plan must be used in moderation. Otherwise, income tax penalties may defeat the potential tax benefits.

How Social Security Benefits Are Calculated

Most of us have a basic understanding of how the Social Security retirement system works. We pay Social Security taxes during our working years and receive Social Security benefits during our retirement years. Your Social Security retirement benefit is based on the amount of income you earn over your lifetime, so generally, the more your earn, the more your benefit will be. But do you really know how much your benefit will be? Do you understand how the Social Security Administration calculates your retirement benefit? Knowing how Social Security benefits are calculated may help us improve the way we plan for retirement.

The first thing to know is to be eligible for Social Security retirement benefits, you need to work for at least 40 quarters (10 years) and earn more than a certain amount of income in each quarter. In 2011, your earnings must be at least $1,120 per quarter ($4,480 per year) for the work to count toward your 40 quarters of needed credit. In previous years, the minimum earnings amount was lower, but it has been increased over the years due to inflation. The amount of earnings that count toward your benefit are also limited to a maximum. In 2011, your earnings in excess of $106,800 per year are not subject to Social Security taxes and are not considered in your earnings history for the retirement benefit calculation. The maximum amount of earnings considered each year is also adjusted upward for inflation.

Now let's go through the formula the Social Security Administration (SSA) uses to calculate your retirement benefit once you become eligible. First, the SSA lists the amounts of all your past earnings per year that were subject to Social Security taxes. They do not include your earnings that were above the maximum earnings taxed in each year. Then, the SSA adjusts for inflation your earnings from past years so that your previous earnings amounts are stated in today's dollars. Next, the SSA selects your highest 35 years of earnings stated in today's dollars and adds together those 35 highest amounts. If you did not work for at least 35 years, you may have some zeros counted in your highest 35 years of earnings. You only have to work 10 years to qualify for a Social Security retirement benefit, but you will need to work at least 35 years in order to maximize your benefit.

Once the SSA has totaled your highest 35 years of indexed earnings, they divide the amount by 420, which is the number of months in 35 years. This provides your average monthly earnings in today's dollars. Then, the SSA breaks your average monthly earnings amount into three parts and multiplies each part by a different percentage. The percentages are fixed, but the dollar amounts of the bend points are adjusted each year for inflation and are stated here as of 2011. The first $749 of your average indexed monthly earnings is multiplied by 90%, the amount above $749 through $4,517 is multiplied by 32%, and the amount above $4,517 is multiplied by 15%. The SSA adds together the three results to determine your primary insurance amount, which is the estimated monthly retirement benefit you are eligible to receive at your full retirement age.

The amount of your Social Security retirement benefit can be lower or higher if you begin receiving a benefit sooner or later than your full retirement age. Your benefit can decrease or increase by approximately 8% per year for early or delayed receipt, but the exact percentage will depend on when your full retirement age is. Your full retirement age is somewhere between ages 65 and 67 depending on your year of birth. Once you start receiving a retirement benefit, your benefit will adjust upward in some years to account for cost of living increases. There are additional factors that can affect the amount of your Social Security benefit, so you may want to consult a financial planner before starting to collect benefits. Hopefully, knowing how Social Security retirement benefits are calculated will allow you to better plan for the benefits you expect to receive in retirement.

Source: Social Security Administration Actuarial Resources

Couples Money Management

Couples who are married or cohabiting at some point have to decide how to manage their joint finances. There are multiple ways in which couples can successfully managed their joint finances, so each individual couple has to decide which money management style works best for them. This article reviews a few options for how couples may manage their money together.

Everything Joint
One option is to open a joint checking account and deposit all income into and pay all expenses from the joint account. This method requires the couple to ignore potential disparities between their individual incomes and individual expenses. Due to that, the everything joint method works best when the disparity between incomes is so large that one partner is financially supporting the other partner. Having everything joint may also work well when the majority of all expenses are joint or when only one partner prefers to do all of the management.

Everything Separate
Another option is to maintain only separate checking accounts, and the partners individually pay their various joint expenses. This method works well when the partners have similar individual incomes or when they have just a few joint expenses. As an alternative to dividing up payments, one partner can pay all of the joint expenses and the other partner can reimburse the paying partner with his or her part of the joint expenses owed. The everything separate method will require both partners to be active in the management and accounting of expenses.

Joint and Separate
A couple may also combine the joint and separate methods by maintaining both types of accounts. With this option, the couple can deposit all income into the joint account and transfer an allowance to to their separate accounts for individual expenses, or the couple can deposit all income into their respective separate accounts and each transfer an allowance to the joint account for shared expenses. This method works well when the couple has different spending preferences. The couple uses their joint account only for expenditures that are agreed upon by both partners, and they use their individual accounts for expenditures which they do not need to consult with their partner. For this reason, the joint and separate method limits financial stress for many couples.

Once a couple decides how to manage their joint finances, they should also decide which financial responsibilities will be managed by each partner. Even though the responsibilities may be delegated, each partner should know how to manage all of the financial responsibilities in case he or she needs to perform the other partner’s responsibilities at some point. Almost any money management style can work successfully for a couple as long as both partners communicate, understand, and agree to a common practice.

CFP Board Registered Programs

The Certified Financial Planner™ certification is the recognized standard of excellence for personal financial planning. Candidates for CFP® certification must meet four requirements to obtain certification: education, examination, experience, ethics. The education requirement can be satisfied by obtaining a bachelor's degree from an accredited college or university and completing a financial planning curriculum registered with the CFP Board.

Many universities in the United States offer an undergraduate degree program, a graduate degree program, or a certificate program that satisfies the CFP Board's education requirement. The following are universities located in the State of Texas that offer such programs.

Undergraduate Degree Programs

Angelo State University - San Angelo, Texas
B.B.A., Finance Major with Financial Planning Option

Baylor University - Waco, Texas
B.B.A., Financial Services & Planning

Stephen F. Austin State University - Nacogdoches, Texas
BBA in Finance

Texas Tech University - Lubbock, Texas
B.S. Agricultural Economics / Minor in Personal Financial Planning
B.S. Personal Financial Planning
Undergraduate Minor in Personal Financial Planning

University of North Texas - Denton, Texas
B.B.A., Finance, Financial Planning Track

University of Texas at Dallas - Richardson, Texas
Bachelor of Science, Finance Major, Personal Financial Planning track

University of the Incarnate Word - San Antonio, Texas
B.B.A. in Banking and Finance with a career path in Financial Planning

Graduate Degree Programs

Southern Methodist University - Dallas, Texas
Financial Planning Certificate Program in Plano

St. Mary's University - San Antonio, Texas
Master of Business Administration (MBA), Financial Planning Track

Texas Tech University - Lubbock, Texas
M.S. Personal Finance / M.S. Finance
M.S. Personal Financial Planning
M.S. Personal Financial Planning / MBA
M.S. Personal Financial Planning / JD

Certificate Programs

Rice University - Houston, Texas
Classroom-Based CFP® Certification Education Program

Southern Methodist University - Dallas, Texas
Financial Planning Certificate Program in Dallas

Texas A&M University - Commerce, Texas
Certificate in Financial Planning

Texas State University - San Marcos, Texas
Certificate in Financial Planning Program

Texas Tech University - Lubbock, Texas
Graduate Certificate in Personal Financial Planning

University of Dallas - Frisco, Texas
Financial Planning Certificate Program

University of North Texas - Denton, Texas
Certificate Program in Personal Financial Planning

University of Saint Thomas - Houston, Texas
CFP® Certification Education Program

University of Texas - Arlington, Texas
CFP® Certification Education Program

University of Texas - Austin, Texas
Financial Planning Certificate Program

University of Texas - San Antonio, Texas
CFP® Certification Education Program Online

The education requirement for CFP® certification can alternatively be met by obtaining certain other degrees or professional designations. Academic degrees and credentials that fulfill the educational requirement include: licensed attorney, Certified Public Accountant, Chartered Financial Analyst, Chartered Financial Consultant, Chartered Life Underwriter, Doctor of Business Administration, Ph.D. in business or economics.

Source: CFP Board, July 2011

Spend Less Strategies

Wealth is accumulated when income exceeds expenses. Wealth accumulation can be accelerated by increasing the spread between income and expenses. Some people prefer to widen that spread by generating more income, while other people prefer to reduce their expenses. For those who prefer the latter, here are five simple strategies that can help you limit the amount you spend.

Buy only what you need.
This simple concept can be easily overlooked as people often lose touch with which expenses really are necessary. You may have been paying for some things so long that you forget about those expenses being discretionary. Almost every budget has discretionary expenses. These expenses can include things like dining in a restaurant, subscribing to premium television, or even upgrading your residence. Sometimes we may need an item, but we do not need the best version of that item. Sure, you need a place to live, but do you really need that huge house with the excellent view in the expensive neighborhood? Sometimes we can be confused with what we really need because we have people telling us we need things that we do not. If you want to lower your spending, try to classify which of your expenses are necessary and which are unnecessary and then reconsider if you want to keep paying for all of those unnecessary expenses. If you still have questions about whether you should be paying for an item or not, seek the guidance of an unbiased third party rather than relying only on the persuasion of a salesman.

Research and compare prices.
Impulsive purchases can cause people to buy things they should not buy and pay prices they should not pay. Shopping is a good way to discover what you want to buy, but that browsing should be complemented with research before making the purchase. If you see something you want, write down the product information, and then leave to do your research. Search the Internet for more detailed specifications and for product reviews. Read about the item in consumer buying guide magazines and websites. You may discover the item you wanted would not really serve your needs, or you may discover alternative items that could better serve your needs. If you complete your research and still want to buy, then compose a list of all stores that sell the item, including online stores, and record each seller's price for the item. This research can also provide you ammunition when buying from sellers who are negotiable or willing to match prices. Narrow down your list of sellers to the ones you feel comfortable buying from and then go with the seller who will give you the best price.

Buy used rather than new.
Used products often cost less than new products, so buying used can be a great way to lower costs. However, you want ensure the quality of the product does not greatly suffer as a result of being used. Products to consider buying used are ones that depreciate in value faster than they depreciate in quality. For example, new cars depreciate significantly as soon as the buyer drives them home. You also want to be able to easily evaluate the quality of the used product. For example, a used computer has more unforeseeable problems than a used dinning table. The lower price of a used item is sometimes due only to a reduced prestige for the item because it was previously owned rather than a result of actual deterioration of the item's quality. Sometimes the lower price is due to an inefficient secondary market; although, the Internet has helped provide a larger marketplace for resell of many used items. Many sellers are more interested in just disposing of their used items rather than recovering the costs they paid for the items. If you are willing to invest time and effort into shopping for used items, you can find some excellent deals.

Pay cash rather than finance.
When you buy an item on credit, you are borrowing money for the purchase, and if you have to pay any expenses to borrow the money, that increases your costs. If you want the lowest price possible, paying cash for an item will always result in a lower price than financing and paying interest. The most common reason people borrow money for a purchase is because they do not have the cash reserves on hand to pay for the item all at once. Therefore, they must pay more to borrow money so they can afford the purchase. When you borrow money to pay for an item, then really consider whether you can comfortably afford the item, and not just whether you can afford the monthly payment. When you finance the purchase of a depreciating asset, your debt on the item could be greater than the value of the item at some point in the future. In this case, you have paid interest costs that can never be recovered even if you sell the depreciated item. The one time you may financially benefit from financing a purchase is when the item appreciates in value and is sold in the future. In that case, you can use leverage to enhance your realized gain and potentially recover all the interest costs you had to pay.

Do it yourself when you have the resources.
When you pay other people for their goods or services, you are paying them for their ability and time to produce and provide those goods and services. When you have the ability and time to produce and provide the goods and services for yourself, you can eliminate the need to pay others for those items. This strategy has some limitations due to specialization of labor and economies of scale. You can learn how to make and do just about anything for yourself, but the resources you must invest may cause you to spend more than you would by paying other people to provide those goods and services. For example, you could go acquire all the education and equipment necessary to build an automobile for yourself, but you would probably spend less purchasing one already built by an automobile manufacturer. On the other hand, you can spend less with the do-it-yourself strategy when the education and equipment investment is low, and especially when the need is routine. For example, you could spend less by cleaning your home by yourself every week rather than paying for maid service to perform the same task. If you have sufficient time, knowledge, and maybe most importantly, the willingness to do things for yourself, this can be a great way to lower your expenses.