Tax Refunds Are Bad For The Economy

February 4, 2012 By Leave a Comment

So you say you’re getting a tax refund this year?  Isn’t that delightful.  Now you’ll have “extra” money with which you can do whatever you like.  Most likely you’ll consider it a bonus of sorts and it will be spent on some sort of vacation, gambling binge, or electronic upgrade.  Am I close?  That’s what most people do, right?  So why should you be any different?

If you’re like millions of Americans who over-pay their taxes, you might be getting some of that money back!  Wheeeee!  So what should you do with that “extra” money?

First things first.  Recognize that it’s not extra money.  This is money that you loaned to the government interest free.  It’s hard-earned income that should be in your hands, not the government’s hands.  You do work hard don’t you?  You do want your money to be in your pocket right?  Then stop giving it to the government in advance.

Getting money back at the end of the year is not an indication that you’re winning with money.  It’s not a barometer that measures success.  It’s a tell tale sign that you aren’t doing the right thing with your money and that something needs to change.

If you’re getting a refund, you’re doing something wrong.  And, some companies are helping you continue this trend.

Some tax preparation companies build their entire business models on the fact that you might be entitled to a refund from the government.  They sell you on the fact that they can help you get more, and then they help you think about ways you can spend that money.  Then, you buy into their marketing with some of your refund as a fee to make sure you’re getting as much of a refund as possible.

For the average family living paycheck to paycheck, a $3000.00 refund, for example, might seem like an annual treat.  But if you divide that number by 12, you get $250.00 per month in additional income with which to budget.  When given large refunds, people tend to spend that money in their heads on big, extravagant purchases to satiate their desire for some sort of relief from the monthly grind without realizing that they could have had more wiggle room every month.

Can’t save up that emergency fund?  Need that deductible for unexpected insurance gotchas?  Need a bit extra every month to pay down debt?  You know where to find it.

“But if I don’t pay in, I might owe…”

Yep.  That’s true, you might, but if you plan for it, and save for it, it won’t be a problem, will it?  The optimal plan puts you at zero owed, zero paid back at the end of the year.  It’s hard to nail that right on the nose, but personally, I’d rather owe, have complete control over the money, and not give it to the government.  If it sits in my account, I earn the interest on it.

“It’s like a savings account…”

I hear this from people who don’t have the discipline to save and don’t understand the amazing power of compound interest, which Albert Einstein once declared to be “the most powerful force in the universe.”  Those same people struggle to make their monthly expenses and don’t even realize they could have more breathing room, pay off debt faster, or save for a specific goal.  I’ve heard out of the mouths of people who are getting refunds that they “aren’t able to save $1000.00,” that it’s “just not realistic.”  Oh really?  If you’re okay with your employer automatically sending your “savings” to the government, why not just adjust your W4 so you get more of your paycheck, then setup an automated transfer into a savings account.  Label that savings account “Tax Savings” and leave it alone.

Bottom line?  You are in control of how much money your employer withholds from your paycheck when it comes to Federal and State taxes.  Social Security?  Not so much.  (Man am I fired up about that one!)  If this year you get a big refund, adjust your W2 so that your employer reduces the amount they withhold by the amount of your previous year’s refund.  You should be in much better shape the following year.

 

 

Filed Under: Personal Finances Tagged With: , , , ,

Please, I Beg of You, Get In The Know

December 18, 2011 By Leave a Comment

You MUST know what’s going on in your personal financial world.

There are a few things in life that we all have in common.  Among those are the need for food and water, and something with which to trade for it.  Money.  Until our country collapses (Read the article 50 Facts About the US Economy That Will Shock You by Becket Adams) we have currency that we can trade for goods and services.

There are plenty of articles circulating in our electronic world that point out that Americans don’t pay attention to what they eat, and there are probably just as many that point out that we don’t pay attention to what we spend.

What do you do?  Do you really know what’s going on in your financial world?  It actually matters to you, and if you aren’t aware of what really matters to you, then you’re lost.

Your Budget (Yuck, right?  No, not so much.)

Let’s break this into a few categories.

Category 1:  The Revealed Budget, or the “Unplanned” Budget

This is where you start.  You need to simply look at what’s going on with your money, and write it down.  Write down what you make, subtract what you spend, and that gives you a Revealed Budget.  It’s a snapshot of your behavior.  It shows you what you’re spending your money on.  Don’t worry about the facts, just get them on paper so you can see the truth.  If you don’t know this information, you’ll never master the next category.

Category 2:  The Planned Budget

Start with the 4-walls.  At the top, write your net income for a given month.  Subtract the 4 walls (Food, Housing, Utilities, Clothing, Transportation.)  I know, that’s 5, but you can figure out which ones are related.

Why do we define the 4 walls?  Because these are the basics.  If ALL you had was enough to pay for the 4 walls, you could survive. NOTHING else gets a dime until you take care of the basics.

Once you’ve covered the necessities (please understand the true spirit of that word) then you move to the next most important bills until YOU HAVE NO MONEY LEFT to spend on your budget.

One the 1st day of every month, do this exercise.  Write your income at the top, then subtract your expenses.  If your obligations are such that you have something left over before paying all of your month’s bills, then you didn’t write your budget properly.  You need to revise it so the number at the bottom of the page is ZERO.  This leads us to Category 3.

Category 3:  The Revised Planned Budget

If you have money left over on your budget, assign it to something.  Make a plan for it.  Know where it’s going.  Your budget will not be right the first time you do it, and you should expect to revise it monthly as life changes from month to month.

Need help?  Just ask.  I enjoy helping people solve their money problems.

 

Filed Under: Financial Basics Tagged With: , , , ,

Really, Fannie Mae?

December 7, 2011 By Leave a Comment

DSNews reported today that Fannie Mae believes the market will adjust in 5 years.  Adjust from what…to what?  We’ve been hearing this term “rebound” since the market tanked, but nobody is clear about what is meant when this is said.

Are they thinking that prices will return to the height of the market?  Not likely.  A measure of average appreciation in the 10 years prior to 2004 will show modest increases year over year.  If you apply the increase as though the market never went ape shit, you can draw a simple average that shows that even in 2020, prices won’t even come close to what they were in 2006.  So what do they actually mean when they report a potential “rebound?”

Government being involved in our business is nothing new, and fortunately for those of us who can think for ourselves, it will continue to fail at attempting to change the economy.  Perhaps that will keep the reality of personal economy driving the nation a reality long enough for us to regain control over our own nation.  Remember, we, individually, are the economy.  When we go to Starbucks, we are the economy.  When we see a movie, we are the economy.  The economic problems in this country can only be attributed to the personal financial habits of each and every individual.  The government only screws things up when they try to “boost” the economy through rules and regulations, and they do not have a crystal ball to predict the future.  The only “crystal ball” they have is their ability to manipulate the market to achieve half-assed short-term results.

 

Filed Under: The Powers That Be Tagged With: , ,

The Drifter vs. The Non-Drifter

November 30, 2011 By Leave a Comment

In Napoleon Hill’s “Outwitting the Devil,” an interview between an Earth-bound being and the devil takes place in which the concept of the drifter is revealed by the enemy.  When asked what the characteristics of a drifter are, the following list is presented.  Shortly thereafter, a list of characteristics of a non-drifter are outlined.

The Characteristics of a Drifter

  • Total lack of a major purpose in life
  • He will be conspicuous by his lack of self-confidence
  • He will never accomplish anything requiring thought and effort
  • He spends all he earns and more too if he can get credit
  • He will be sick or ailing from some real or imaginary cause and calling to high heaving if he suffers the least physical pain.
  • He will have little or no imagination
  • He will lack enthusiasm and initiative to begin anything he is not forced to undertake, and he will plainly express his weakness by taking the line of least resistance whenever he can do so.
  • He will be ill-tempered and lacking in control over his emotions.
  • His personality will be without magnetism, and it will not attract other people.
  • He will have opinions on everything but accurate knowledge of nothing.
  • He may be jack of all trades, but good at none.
  • He will neglect to cooperate with those around him…even on those he must depend on for food and shelter.
  • He will make the same mistake over and over again never profiting by failure.
  • He will be narrow-minded and intolerant on all subjects ready to crucify those who disagree with him.
  • He will expect everything of others, but be willing to give nothing in return.
  • He may begin many things, but complete nothing.
  • He will be loud in his condemnation of his government, but he will never tell you definitely how it could be improved.
  • He will never reach decisions on anything if he can avoid it, and if he is forced to decide, he will reverse himself at the first opportunity.
  • He will eat too much, and exercise too little.
  • He will take a drink of liquor, if someone else will pay for it.
  • He will gamble if he can do it on the cuff (meaning on credit.)
  • He will criticize other who are succeeding at their chosen calling.
  • The drifter will work harder to get out of thinking than most others work at making a good living.
  • He will tell a lie rather than admit his ignorance on any subject.
  • If he works for others he will criticize them to their backs, and flatter them to their faces.

The Characteristics of a Non-Drifter:

  • He is always engaged in doing something definite through some well-organized plan which is definite.
  • He has a major goal in life towards which he is always working and many minor goals, all of which lead towards his central scheme.
  • The tone of his voice, the quickness of his step, the sparkle in his eyes, the quickness of his decisions clearly mark him as a person who knows exactly what he wants and is determined to get it, no matter how long it may take or what price he must pay.
  •  If you ask him questions, he gives you direct answers and never falls back on evasions, or resorts to subterfuge.
  • He extends many favors to others but accepts favors sparingly, or not at all.
  • He will be found up front whether he is playing a game, or fighting a war.
  • If he does not know the answers, he will say so, frankly.
  • He has a good memory…never offers an alibi for his shortcomings.
  • He never blames others for his mistakes no matter if they deserve the blame.
  • He used to be known as a go-getter, but in modern times he is called as a go-giver.
  • You will find him running the biggest business in town, living on the best street, driving the best automobile, and making his presence felt wherever he happens to be; he is an inspiration to all who come into contact with his mind.
  • He has a mind of his own, and uses it for all purposes.
To learn more about what a “drifter” is, consider adding Napoleon Hill’s “Outwitting The Devil” to your library.  It’s a fantastic read.
Filed Under: Featured Tagged With: , , ,

Will Banks Settle for Less Than I Owe?

November 8, 2011 By Leave a Comment

Yes.

Think about it.  Anyone who lends money does so understanding that there is a risk that the borrower will refuse, or will be unable to re-pay the loan.  Let’s do a quick example on $100,000 at 4% for 30 years.

Your payment would be $477.42, which you happen to faithfully pay for 5 years before you lose your job and fall behind.

During that 5 year period (60 payments) you paid out $28,645.00 of which $19,393.00 was pure interest to the bank.  The balance on your note at this point is $90,748.00.  The bank has already recovered nearly $20,000 of it’s initial risk in the first 5 years.  Subtract the total interest from the balance of your loan, and you’re left with a break-even settlement.

If you offered a settlement of $71,355.00 ($90,748 – $19,393) which would be 78.6% of the balance owed, the bank would break even on you.  Anyone who is persistent could make that deal happen.

So again, the answer is yes.

What if the settlement was less than the break even?  You could still do it, because the risk involved involves a possibility of loss, which the bank has a tolerance for if they see that they’re going to lose more money in the future.  Banks would rather cut their losses (loss mitigation) sooner than later.

So you offer $50,000 to pay off a $90,000 balance.  On the surface that looks like a 55% payout, but remember that you’ve already paid them $20K or so.  So a $50,000 settlement on $90,000 with an original loan of $100,000 is actually only a 30% loss.

If the bank had an insurance policy on the money, then there will be a claim that will close the gap even more, resulting in even more loss mitigation.

The bottom line is that any time someone owes someone else money, and the lender can see clearly that they are in a situation where they need to cut their losses, they will definitely cut their losses.  You’d do it to if someone owed you money and offered you a “take it or leave it” settlement.

Filed Under: Personal Finances Tagged With: ,
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