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: , , , ,

A Quick Note on Borrowing To Save

October 12, 2011 By Leave a Comment

Borrowing to save?  Yep.  That’s what I said.  Borrowing to save.

If you know me, you know that I detest debt.  I will NOT borrow money, and I also won’t lend it.  I have enough of a history of debt, and I’m done with it, permanently.  It’s worth it to me to suffer now so I won’t be a slave any more.  Period.  It has ruined aspects of my life, and it has ruined relationships.  It’s not worth it.

With that said, the inspiration for this quick note (grin) came from a recent comment on a post that I left on Facebook.  The comment goes something like this:

I love the part about saving, but sometimes you have to refinance in order to save.

If your brain just popped like the tin lid on processed food and your palm found its way to your face because you know better, then good for you.  You have 20% of the equation solved.  The remainder is 80% behavior.

Myth.  Refinancing will free up extra money so you can save.

Truth.  Most Americans who refinance to free up some of their income will spend the difference.  They won’t save it.  True wealth-building savings comes 2nd to giving, not 2nd to spending.  You see, the healthy flow of your income should look something like:

1.  Give

2.  Save

3.  Spend

IN THAT ORDER

You give to your charities or cause or church first.  After that, you pay yourself by SAVING.  Don’t you work hard?  Why would assign your most valuable wealth building tool (your income) to someone else after you’ve already completed your giving.  The bank is not a charity.  Finally, what’s left over is what you learn to live on.  If you can’t cut lifestyle AND increase income, you’re always going to be broke.

Do it any other way and I would challenge that the person who GIVEs SAVEs SPENDs will outperform the person who SPENDs SAVEs GIVEs.

If your mindset tells you that the only way that you can save is to combine your loans into one lower payment so you have extra money at the end of the month, then you’re already losing financially.  Rich people ask the question “How much does it cost?”  Poor people ask the question, “What’s the monthly payment.”

The implication by someone who would refinance in order to save is that they also are concerned more with the monthly payment than they are with the total cost over time.  Now, I don’t know the particular person who made this comment, but they’re about as normal as the average broke American, buying into these types of lies.  They probably don’t have an emergency fund, and they probably owe many people lots of money.

The reason that being concerned with the monthly payment keeps you in a rat race of “brokeness” is because in order to get rich, it takes TIME, and people focused on monthly payments are financially myopic.  Investments take time and hard work.  Growth takes time…and hard work.  If you’re focused on how much this month, then you’ll miss how much it really costs.

A good example is the simple difference between a 15 year and 3o year mortgage.  If you compare the two, a 15 year note for $100,000 at 4% yields a monthly payment of $739.69 and has a total cost of $133,143.83.  A 30 year note for $100,000 at 4% yields a monthly payment of $477.42 and a total cost of $171,869.51.

So, you save $262.27 per month by taking the 30 year but by doing so, your total cost increases by $38,725.68.  That means that you have to save $262.27 per month for 147 months just to break even on the added TOTAL COST of the note, and then you’ll STILL HAVE 213 months of mortgage payments left.  On the plus side, that means you’ll have a pretty healthy savings account by then.  But wait.  If that’s the case…if you’re able to save the difference after financing the loan, or re-financing, then why weren’t you able to save before you had the loan?  What makes you think you’ll have the discipline to carry this out when you don’t have any savings to begin with?  If you DID have the savings to begin with, then you wouldn’t be borrowing any money, and the $100,000 home would cost you just that.  $100,000.  At best, you’d have a healthy down payment, reducing the overall cost AND the monthly payment.

Big news flash.  People don’t have a habit of positioning themselves such that they have extra money with which to save.  They typically spend first.  When they apply for loans, they approach their lenders with the mindset that says, “how much can I afford every month?”  The average bank then gives you a maximum price for your purchase to fit that number and then you’re tapped and won’t have the extra income to save the difference.  The bank wins.

Don’t fall into this trap.

Give.  Save.  Spend.  Sacrifice now so later you’ll be able to live crazy well and help others do the same.

Wall Street has nothing to do with your personal economy.

 

Filed Under: A Call To Action, Stupid Tax Tagged With: , , ,

The Value of Time, The Cost of Impulse, Hover Your Mouse

May 11, 2011 By Leave a Comment

Sounds like a great title doesn’t it!  What inspired me to post this evening?  Well, it’s as simple as an unbelievably obvious trap posted on Facebook that has been rampantly unleashed…

…it’s a trap that not only takes up your valuable time, but also spreads the disaster across every one of your friend’s walls, taking up their time…

…all because of impulse.

Let me jump to the moral of the story, even though I think I’ve mentioned it before.  Time is valuable, and there are thousands of @$$holes out there who don’t care about your time, and plan to attack you and your ignorance at every turn.  (Remember, ignorance just means you don’t know this fact.  It doesn’t mean you’re stupid inherently.)

One of the most overlooked aspects of most people’s personal economy is the actual value of their time.  A) You are worth more than you think you are. B) You are worth more than you think you are.  C) I’m wasting your valuable time by writing this a third time.

Your wage at work is not a defining factor of your value, because you aren’t working 24 hours, 7 days per week.  When you’re not working, what would you ask someone to pay you to give up your free time?  $25 dollars per hour?  $50?  $100?  Consider this as you spend free time.

Back to the problem at hand.

Online phishing scams, (which chew up your free time) are extremely easy to avoid, as long as you develop the mindset that they exist [and will never go away] at nearly every turn you take.  If you adopt this way of surfing then you’ll always be aware that you are a target in the scope of an unknown online “terrorist” (I know, exaggeration, but it feels like it anyway) looking to suck the life and time out of you (didn’t we establish that you’re worth more than you think?)  Many times the only thing that it accomplishes is eating up computer network bandwidth to slow down the system overall, i.e., Facebook.  Imagine what’s going on when a link that you click sends a message to all of your friends.  That’s 500+ (oh, sorry, are you not that popular?) people or even more that will get a message…times 500, times 500, etc., until millions, even hundreds of millions of people receive the nonsensical message.

So, how do you avoid these?

Concerning hyperlinks (if you don’t know what a hyperlink is, turn off your computer forever, or read this,) take it upon yourself to do a quick verification of the destination of the link.  P.S., this is a perfect opportunity to try out that hover idea, which I’ll explain below.

When you encounter a hyperlink, hover your mouse over it before you click it.  When you hold your mouse over the link, you’ll see, in the status bar at the bottom of your browser, the actual address that the link opens is revealed.

If the destination in the status bar is unrecognizable to you, DO NOT CLICK THE LINK, unless you know for certain you were expecting a message from someone with a specific link.

If the destination in the status bar is recognizable, but you’re unsure…DO NOT CLICK THE LINK. Instead, research the validity of the message sent to you.

Soon, you will come to understand that the time it takes for you to deal with these annoying problems isn’t worth the time it takes to deal with these annoying problems.  I know, like I said before, again, it sounds repetitively redundant, as well, but…

Anyway, as I was saying, sometimes the goofy messages you receive aren’t worth your time anyway, because the person sending them isn’t aware of the value of their own time.  So, if the link you receive is legitimate, but it encroaches upon your valuable time, politely delete it :) .

 

 

Filed Under: A Call To Action, Basic Life Skills of the 21st Century Tagged With: , ,

What If You Don’t Know Your Future Income?

November 15, 2010 By Leave a Comment

A Twin Cities connection of mine, Jerrid Sebesta, is a fellow hard-core money mastering fool like myself.  He’s also a meteorologist.  Why anyone would study meteors is beyond me.  They’re too fast…and haven’t you seen what will happen to Earth some day?  Just ask Bruce Willis and Morgan Freeman.

“ooh how I wish it would rain down…”

Jerrid is also a guest-blogger who contributes to the Life & Money section of momslikeme.com. His most recent articles on personal finance touch on the dreaded “B” word, a topic I’ve written about quite a bit as well.  In an article entitled, Budget Basics, Jerrid shows you a simple spreadsheet budget for the average income earner, whereby every penny is spent before the month begins.

If you aren’t familiar with this concept, get familiar.  It’s critical to your financial success.  Before you start your month, you need to assign a destination for all of your money, yielding a zero balance before the month starts.  In other words, if you make $4000.00 net in one month, all $4000.00 needs to be given a name and a place.  This will help you avoid the “too much month at the end of your money” problem, as Dave Ramsey says.

But what happens to your budget when you don’t have a regular income?  How do you assign your money to an expense plan if you’re 100% commissioned?  It’s easier than you’d think.  In Jerrid’s example, there’s only one thing that I would change, and it’s simply a preference.  I would prioritize the expenses on the spreadsheet.  For all intents and purposes, the result would be the same in his example, so it’s not too much to fret over.

For those of us who don’t know when we’re going to get paid next, it’s critical that we use a prioritized spending budget. It’s pretty much the same concept, and the end result is similar.  The major difference is that with a regular income, you’ll be able to balance your monthly budget so the resulting difference between your income and expense is zero.  In a prioritized spending budget, you’ll probably have a negative number at the bottom of your page until you get paid.  Some months you’ll see a loss, some months you’ll see gains.

Whatever it may be, you’ll need to start by listing your expenses in the order of priority, always starting with the 5 basics in this order:  1) food, 2) utilities, 3) housing, 4) transportation, 5) clothing.  Continue with all of your other expenses as you know them, and then when you’ve got everything written down, begin asking yourself the following question.  “If there was one thing that I absolutely had to spend my money on this month, what would it be?”  Put a #6 next to that thing (you’ve already got #1-5).  Ask the question again, and put a #7 next to that.  Keep going until you reach the end.

If after you cover your basics, you’re out of money, then you need to make some serious changes.  You either need a new job, or you need to lower your housing lifestyle (remember, no more than 25% of your take-home pay.)

Be careful though.  With a prioritized spending plan, it’s much easier to stray from the plan, because you don’t know how much you’re going to make, and you may hit a big sale one month, giving you the false sense that you’ve got all kinds of money.  Don’t fall into that trap.  In fact, when you start to refine your craft to the point of making a regular average income, you can modify your spending plan to reflect a steady figure.

For instance, if in 2009 you were paid $64,000 in commissions erratically in only 4 months out of the entire year, then you can create a baseline target goal of +/- $64,000 for 2010.  Then, because you don’t know if the year will be as good as the previous, write your budget based on a $42,000 annual income, and stick to it, socking away all of the extra money for a rainy day.  If you continue to increase your income over time, you can adjust your “salary” to fit better.

A common mistake people make is to see that big commission check as a huge bonus that they can just spend, because, “hey, I’ll sell the same deal next month.”  Not a good plan.  Tighten your lifestyle so that it doesn’t bleed you dry.

Whether it’s a prioritized budget for the unknown income, or a steady budget for someone who knows how much they’ll be paid every month, having that plan will not only result in financial success, simply knowing the details will alleviate all kinds of stress in the family.  Don’t be frustrated if you don’t get your budget right the first time.  If you do, you’re a superhero.  Trust me, you will make mistakes and it will take a few months to refine it and deal with the various compromises you and your spouse may have to make to dial in a good plan.  Remember, if you’re married, you both have a vote.

Filed Under: Financial Basics, Personal Finances, Planning and Budgeting Tagged With: , , , ,
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