Author Archives: Peter D

Overhauling Your Budget from Top to Bottom

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Sometimes you need to make big changes to see a lasting change. Many budget experts believe that you need to first tackle your bad spending habits before you can really see a difference in your bank account. But when you’ve been living a certain way for years, it can be difficult to even see where to begin. In this situation, you need to perform a complete budget overhaul.

Begin With Your Income

Income can be incredibly difficult to estimate — so don’t. Make sure that you know exactly how much you have in take home pay every month. If your pay varies, estimate it out based on the amount you took home the last six months; don’t try to estimate based on the most that you usually bring in. Keep in mind that if your pay is erratic you will need to be more careful with your budget. Your budget will need to be more restrictive to ensure that you have a buffer during leaner earning periods.

Separate Your Expenses Into Needs and Wants

Go through your monthly expenses and separate every expense that you had into two piles: a “need” and a “want.” Rent is a “need” — it’s something that you cannot avoid spending money on. Going out to eat is a “want” — it’s something that you enjoy but that you don’t necessarily need to do to survive. At this stage, you don’t need to make any judgment calls on whether you’re spending too much on each item; you just need to classify all of them. Make an orderly list.

Find Ways to Reduce the Cost of Your Needs

Once you have separated your expenses, go through your needs line by line and identify areas in which you can save. Rent and transportation are two of the most costly expenses and occasionally they relate to each other; often you can save money on rent by moving farther away, but you need to spend more money on transportation to compensate. Other areas can be more straightforward; you may be paying $80 a month for a cellphone but be able to get by on a $40 month plan. Investigate alternatives for each of your budgetary line items to find sensible ways to reduce the cost. Something like downgrading your cable is likely to save you a lot of money over the course of a year but will probably not have a significant affect on your quality of life.

Pare Down Your Wants to the Things You Want the Most

When you get to your needs list, your goal is to order them by the amount that you value them. If you spend a lot of money on a multitude of hobbies, now is the time to decide which of those hobbies you enjoy the most and which gives you the most value. Ideally, you should cut your “wants” section down to the top three or top five things that you enjoy, depending on how restrictive your budget is. If you’re a foodie more than a fashion maven, you may find that getting a haircut at a salon doesn’t make the cut, but eating out once or twice a month does. If you’re a reader more than a movie buff, you may find that purchasing a few new books a month is more important than seeing a couple of new release movies in the theater. By prioritizing your wants you allow yourself to still enjoy the things that you enjoy most while cutting back on some of the expenses that really aren’t that important to your happiness.

Put Your Budget Together

Once you have created your revised budget, it’s time to put it all together. Deduct all of your expenses, both needs and wants, from your income to see where you’re at. Remember that it’s more than just having a buffer — you also need to be able to save enough money to create both an emergency savings account and contribute to your retirement fund. Once you have a sensible budget, it’s just a matter of adhering to it on a day-to-day basis.

The goal of creating a budget isn’t simply to restrict your spending — it’s to restrict your spending in a manageable way that will still leave you comfortable and happy. When you create a budget that leaves you frustrated, bored or deprived, it’s very easy to fall back on old spending habits. Like a diet, a budget overhaul has to be done with your continued health and happiness in mind.

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Five Critical Financial Tips For Newlyweds

Getting married is one of the most exciting of life’s milestones.

However, it can be easy for some of the important details about married life to get lost in the rush of the getting married. This is especially true of the financial considerations of getting married.

There are many financial aspects that you must consider when you get married. To help you out, here are some financial tips for newlyweds that will make your life easier.

Sit Down and Have a Frank Financial Discussion

Ideally, this should be done before you tie the knot, but it is never too late to sit down with your spouse to have a frank discussion about your finances.

This should be a no-holds-barred discussion where you are completely honest about every aspect of your financial situation.

Talk about your debts. Talk about whether you are a paycheck-to-paycheck type of individual or a saver. Talk about how you would handle a sudden windfall of cash.

The key is to learn all you can about how each of you approach your finances. This will allow you to avoid surprises later on, and it will also help you plan how to be a financially successful couple.

Set Financial Goals

One of the most important parts of being a financial success is setting goals. When you are a couple, setting financial goals together will help to bring your closer.

There are all sorts of things that couples need for their lives together, and you can set savings goals for all of them. Think about saving for things like a down payment on a home, a vacation and furniture.

You should both be saving at least 10 percent of your paychecks towards your savings goals, but setting a higher goal of 20 percent savings is ideal.

Create a Budget

Setting aside your 10 to 20 percent savings is the first part of creating a monthly budget.

To create your budget, you first need to tally up your remaining income after you have set aside your monthly savings. You then need to subtract all of your regular monthly expenses like groceries, utilities, rent, car payments and student loan payments.

The remainder of your money should be split unto categories of discretionary spending like entertainment, eating out and shopping.

It is very important to stick to the budget. If for some reason you need to go over your budget, it is important that you discuss it with your spouse before you spend money to go over. That way, you can decide together if you really should go over your budget.

Creating and sticking to a budget is the best way to avoid financial problems and arguments when you are married.

Decide How to Set up Your Bank Accounts

When you are married, it is best to have multiple checking and savings accounts.

You should have a joint-savings account that you use for your savings goals. You should also have a joint-checking account that you can both access to pay for bills and things that are a part of your budget.

You also may want to each have separate checking accounts if you so desire.

Tax Considerations

One of the things you may not have considered is that getting married can affect your tax situation.

You can either file jointly as a married couple or file individually under the category of married filing separately.

Most couples choose to file a joint tax return because of the tax benefits. It is also simpler to file jointly.

However, you if your finances are complicated, you may wish to sit down with an accountant or tax attorney to decide which filing status will benefit you the most.

Photo: Sean Davis / CC 2.0

Three Tips For Getting Your First Auto Loan

Getting your first car is an exciting experience. It gives you a great sense of independence, maturity, and self sufficiency.

What’s not so great, however, is the inevitable auto loan that comes with that experience. It can often seem that understanding and comparing car loans is nearly impossible.

Here are three great tips you can put into use to help you get the best terms on your automotive loan.

Get a Newer Car

When banks and credit agencies consider your application for a loan, they are considering not just you and your credit history, but the vehicle you are purchasing as well.

As a general rule, banks will be much more willing to make a loan on a newer car than on an older one. This is largely because, in the event of repossession, a newer car will be much easier for that bank to get its money back out of.

To make borrowers more likely to consider this, it is common practice for financial institutions to offer high incentives for loans taken out toward the purchase of a car made within the last few model years.

One of the most common incentives is a longer term loan offered for newer cars. Newer cars are often given four, five, or even six year loan terms, whereas older cars are usually restricted at two or three.

These policies vary by institution, but a general rule of thumb is that the longer term loans will be offered on vehicles five years old or newer.

Compare Many Different Lending Agencies

Not all lending agencies will offer you the same terms and interest rates.

As such, it is often beneficial to apply for loans from several different institutions, and then compare the offer each one makes to you. You may very well find that one particular bank is willing to offer you an interest rate that is significantly lower that their competitors.

On a car loan that is likely to range well into the thousands of dollars, even the slightest break on interest rates can represent a substantial savings.

If you have a local credit union, you will want to pay especially close attention to the loan offer you receive from it, as credit unions often have slightly lower rates than traditional banks.

Get a Cosigner, Even if You Don’t Need One

If you have limited credit history, getting a cosigner is one of the best ways to lower your interest rate on your first auto loan.

Even if you have the ability to take the loan out yourself, it very likely that your interest rates will be higher on your own than they would be with a cosigner who has a well established credit history. Finding a friend or family member willing to cosign your loan will help you save a great deal of money on interest payments down the road.

Keep in mind, this is not a one sided proposition. If you do opt to get a cosigner, you are all the more responsible for ensuring that your payments are timely and complete, as another person’s credit is now on the line with yours.

Following these three tips will help you to secure the best possible terms on your first auto loan. To get more information on the exact details of a possible loan, you can contact the credit manager at the financial institution you intend to take your loan out from.

You can also try online peer to peer lending platforms as an alternative to traditional banks and credit unions, as these platforms often offer lower rates.

Six Personal Finance Mistakes That Could Have Serious Consequences

Finance is difficult even for trained professionals. Here are some serious personal finance mistakes that you should avoid making at all costs.

Not Setting Aside Money for an Emergency Fund

Yes, the first thing you should do when money is tight is to save more money. If you set aside a certain amount to pay yourself like it is a bill, you will not have to worry about any unexpected expenses.

The emergency fund is set up to keep you out of debt if something unexpected happens so that you will not have to pay late fees and penalties on top of any debt that you may have incurred.

Not Choosing a Plan to Pay Off Debt

There are two major ways in which you can pay off debt – the Snowball and the Avalanche.

The Snowball method of paying down debt involves throwing all of your resources at the smallest bill until it is paid off. This will give you a psychological lift for the next smallest bill, and so on and so forth.

The Avalanche method means that you pay off the bill with the highest interest rate first. This will save you money over the long term.

Not Buying Staples in Bulk

Certain items like bread, rice, bottled water, underwear and socks can be purchased in bulk from a warehouse.

This will leave you more money to put in your emergency fund or to pay down debt without having to diminish your lifestyle.

Not Giving Yourself a Grocery List

A great deal of the money that you spend in a month goes down the drain without you ever knowing where it went. This money goes towards impulse buys when you take trips to the store or the laundromat.

If you give yourself a definite list before you go out, you will be much less likely to spend these pennies on the impulse products that will quickly add up to substantial amounts of money.

Instead, put this money to work for you by paying down debt or by putting it into your emergency fund.

Not Cutting Out the Fat in the Budget

Much of the money that you spend is on convenience, not on products and services.

Case in point: You will spend almost 20% more money each month to go out to eat rather than staying home. When you go to the grocery store, purchase healthy foods that you can cook.

One specific way that you can lower your budget each month is to stay away from the convenience aisles in the grocery store. Fresh, raw fruits and vegetables cost much less than TV dinners, believe it or not.

Not Investing

This term can mean different things to different people. For one person, it can mean buying a coffee maker rather than going to a convenience coffee shop every day.

For another person, it can mean investing in stocks. Either way, having some accounts going up in value is a psychological lift that will help you to pay down your debt.

It will be even more of a stretch to set aside money to invest, but this goes along with the strategy of paying yourself first when money is tight anyway.

Five Myths About Tax Audits That You Should Forget Immediately

Getting a letter in the mail from the Internal Revenue Service is never a good day for anybody. After all, this is an organization that is set up specifically to take money from you.

However, there are many myths about tax audits that are created out of thin air, most of which encourage more fear than is truly necessary.

Myth: All tax audits are a matter of life and death

The truth about most tax audits is that they are a discrepancy of records. In many cases, the IRS is simply stating that its records do not show the same thing that you reported on your tax forms.

If it is a case of a mistake on their side, you send in the information, and you never even have to come in to see an agent.

Myth: 10% or more of people are audited in any given year

The truth is that less than 1% of people in any given year are audited. The IRS does not keep a tally on the percentage of people that it audits in any given year.

If there are more people who do not keep appropriate records, the more people will be audited that year. If there are less people that do this, then less people will be audited.

There is no such thing as an “audit quota.”

Myth: Having a professional file your taxes for you makes you completely audit proof

The truth of the matter is that you are responsible for all records that have your name on them no matter who files them.

Your professional filer may offer some sort of insurance for help with your representation if you get audited, but the final responsibility falls on you to correct any discrepancies in the records between you and the IRS.

Myth: If you keep your income below at certain threshold, you will not get audited

The IRS has been hiring more people to conduct more audits because of the discrepancy that it is found with records in the past.

However, many people believe that most of these agents are looking for people above a certain income threshold. This is not the case.

Additional audits are being conducted across the board, and just because you do not burn above a certain arbitrary threshold does not mean that you cannot be audited by the IRS.

Myth: If you file for certain deductions, you stand a better chance of being audited

Many people do not take deductions to which they are absolutely entitled because they believe that taking them will raise some sort of “red flag” with the IRS.

The truth is that any deduction that is in conjunction with the law is a deduction that you should take. IRS agents do not determine an audit simply based on the name of a certain deduction.

If you understand the true nature of what IRS audits are meant to do, you will realize that they are nothing to be scared of. Make sure that you keep all of your records as thorough as possible and report according to the law as closely as you can.

If this is your method of filing taxes with the IRS, then you will certainly be able to handle any queries that they may have about your records even if you do get audited at some point in the future.

Photo: James Morris / CC 2.0

Five Tax Myths That No One Should Ever Believe

February is here. And with tax season in full swing, you have probably started to hear those annual rumors about what’s acceptable and unacceptable when it comes to filing your taxes.

Around this time of the year, you can run into a lot of bad advice, so here’s a list of some of the most common tax myths that you should avoid:

Myth #1: Filing Taxes is Voluntary

Although this myth may seem counterintuitive, it’s surprising how many people are actually under the impression that filing taxes is completely voluntary because Form 1040 in the instruction book describes the tax system as “voluntary”.

However, Uncle Sam requires everyone to file taxes, even if you haven’t had any income all year.

Myth #2: Animals can Be Claimed as Dependents

Many people are under the impression that anything that’s alive and in your care can be claimed as a dependent, but that’s not the case.

No matter how you love your pet, you aren’t allowed to claim them as dependents.

And while it may be true that pets receive more than half of their financial support from their owners, they’re still not human, and you still can’t file taxes on an animal.

Myth #3: Illegal Activity is Not Taxable

Although it may not make much sense, criminal activity is taxable.

Regardless of whether you are a bank robber, drug dealer or con artist, the government still wants their cut of your income.

No matter how good you are at hiding your illicit activities, the government will eventually find out about it, and tax you on it. Al Capone is a prime example.

Myth #4: Money Made On the Internet is Tax Free

Since many people doing business online don’t report taxes for their income made online, it’s not hard to see how this rumor got started.

However, regardless of whether you generate money online or at a traditional job, the IRS still requires you to declare that income if it’s over 400 dollars per year.

Myth #5: I Don’t Make Enough Money to be Audited

The amount of money you make doesn’t have as much to do with being audited than you may think. There are many more factors that could possibly send up red flags when it comes to a tax audit.

And while it’s true that individuals who make more than 100,000 dollars per year get audited about twice as much as those who make less than that, those who make under 100,000 dollars per year still have a one percent chance of being audited, which is the national average.

To stay safe, it’s best to save any relevant receipts of anything that could be considered questionable income for three years.

Finding A Tax Professional To Get You Through Tax Season

It’s a new year, and that means it’s tax season once again.

Between now and the magic date of April 15, millions of Americans undergo the annual ritual of gathering documents, saving receipts, filling out forms, navigating the ever-changing rules and, hopefully, ending up with a refund.

If this adventure leaves you scrambling for help, you’re not alone. According to IRS figures, over half of all taxpayers in 2014 paid someone to do their returns, while another one-third used tax software.

Unless your taxes are quite simple or you have great numerical and research skills, the tax code is simply too complicated to tackle once per year. This has led to the growth of a massive tax-preparation industry over the past six decades, since the IRS stopped preparing returns for free in the mid-1950s.

Where To Start

This is a major purchase with long-term consequences. Start by asking around. Work is a good place to start, since many of your co-workers may have similar tax situations.

The Yellow Pages has an entire section filled with practitioners that compete for your business. Interviewing a few of them will give you an idea of their competence, fees and service level.

Several national tax preparation companies serve millions of taxpayers, including H&R Block, Jackson Hewitt, Liberty Tax and others. These companies hire mostly seasonal preparers and train them every year on the latest rules and software. All have both new and experienced preparers to choose from. When contacting them, look for a preparer with the experience that fits your situation.

Accounting and CPA firms are often open year-round and may provide a range of services, including payroll, bookkeeping, auditing and more. Taxes may or may not be one of their specialties, so prospective clients should ask specifically about their tax practice.

Higher Level Help

Several professional designations are used in the tax industry.

An Enrolled Agent is most desirable. This is a person who has passed a difficult exam and is qualified to practice before the IRS.

A Tax Attorney is a licensed, practicing attorney specializing in tax law.

These two professionals may represent taxpayers with the IRS in case of an audit. They are best hired for handling unusual or complex tax situations and are not typically needed for everyday tax returns.

What To Expect

Any competent tax preparer will ask about your personal situation, including marital status, dependents, work, school, home ownership and many other factors covered in the tax code.

Since this is sensitive personal information, taxpayers should look for a preparer with whom they feel confident and have rapport.

Many tax preparers and offices are available only from January through April. A reputable preparer offers tax help throughout the year, either personally or through their firm.

Do Your Homework

Like other occasional purchases, we choose tax services to take care of an essential need in our life.

It is critical to understand that no matter who prepares the return, the taxpayer is ultimately responsible for the results.

Look carefully, ask questions and pick the professional that best fits your needs.

Photo: John Morgan / CC 2.0

3 Financial New Year Resolutions You Should Make This Year as a Small Business Owner

As you know, running a small business requires you to wear multiple hats. Many small business owners do not have the time to be on top of their finances as much as they should.

And it’s easy to understand why. There’s a lot to handle from making sure you’re deducting your expenses correctly, taking care of payroll, to ensuring your accounting is organized for tax season.

But here are some important resolutions you should make this New Year if you want a significant improvement in your wallet.

I Resolve to Take Control of My Business Cash Flow

Your cash flow controls the flow of your business, so delays can quickly halt the progress of your business.

If you’re dealing with cash flow problems due to the way you are accepting payments, you may have to come up with an alternative that works with your customers or clients.

If you’re spending too much on inventory at once and can’t come up with a decent budget for marketing, it’s a good idea to try to restock twice rather than all at once.

The point here is that you need to manage your cash flow to ensure that your business runs smoothly and isn’t at risk of taking a financial hit. Cash flow will be vital for paying your employees on time, having a budget for marketing, and paying for inventory, so even the slightest of delays can hurt your business.

I Resolve to Make the Best of My Inventory

If your business is based on physical goods, then it’s time to take a serious look at your inventory this year. You want to really go through your inventory to see which products are costing you money, which products to order less of on the next run, and which products you need to order more of.

Evaluating inventory has always been one of the best ways for small businesses to save money, but it is also a good way to spot opportunities.

For example, a product that you didn’t think much of may be popular with customers or a product that’s not seeing much volume might have a high profit margin and may be worth marketing to customers.

I Resolve to See My Business Tax Professional Early

Working with a tax professional that specializes in business tax can translate into a significant amount of savings for your business.

You’ll be able to get information on what you can deduct, avoid tax violations that can get you into trouble, prevent your business from being audited, and learn various ways to save even more money.

But it’s very important that you consult with a business tax professional far earlier than when your taxes are due. This will give you the time to run your numbers back to back for accuracy, better organize your tax records, and ensure that all your deductions are accounted for.

Those are just some of the finance resolutions you should make for your small business this New Year. It sounds simple enough, but each of the three on the list does require a respectable amount of your time.

So rather than trying to spread yourself thin trying to put all three into place, start with one until you feel that you’ve gotten that aspect of your small business finances in order.

Once you see some success, you’ll quickly gain the motivation to put the other two financial resolutions into action.

Photo: 401(K) 2012 / CC 2.0

Three Resources For Getting Your Finances Under Control In 2015

Improving your grasp on personal financial is one of the most powerful things you can do for yourself at any age. Sound financial management frees more of your time and energy for improving your life in all areas.

Get started with the best personal financial resources to make your life easier. Whether you need to get out of debt or track your growing income, there’s a program, app or free information just a click away.

Mint

Mint ranks as one of the top finance programs for several reasons.

It’s relatively easy to use, even if you’ve never tried any kind of budgeting software. It autopopulates your account information, meaning you don’t have to make individual entries.

For anyone who has been using a spreadsheet online or keeping accounts offline in multiple registers or logs, Mint offers a major time savings. Its full suite of features mean you can trade in multiple ways of tracking and managing your money for one solution.

Mint puts all your accounts in one place, simplifying the process of tracking and managing your money. With this all-in-one budgeting tool you have the power to set bill reminders, watch your spending and keep tabs on your credit cards, checking and savings balances from one program.

This makes it an outstanding tool for people who need more organization and streamlining in their financial lives.

You Need A Budget

YNAB sets itself apart by offering training to go along with its budgeting software.

The principle behind the program is a sound one: it trains you to live on last month’s income. If you have difficulty meeting expenses month to month, are in debt, or see the prospect of debt looming, working with this program could solve your problems.

With its training modules, you get ongoing help with difficulties so you can get your money on track. It’s easy to make adjustments in the budget, so it adapts with you when spending or income changes.

The membership for YNAB costs $60. A free, no obligation trial period allows you to try out the software, receive training emails and have access to the website to see how it suits your needs.

For anyone in debt or who needs to get a better grasp of money management, YNAB is a refreshing option. The layout is simple enough to give you the big picture on where you stand at a glance, yet offers customization so you can create categories that fit your life.

With YNAB you learn to assess your financial standing before making decisions such as opting for a major expense or cutting back on spending categories that may be out of balance with your income.

More than budgeting software, YNAB offers a money management boot camp to help people make better financial decisions.

Kiplinger.com

Kiplinger’s stands out with authoritative information on key personal finance topics.

In addition to detailed articles that will improve your grasp of personal finance, you’ll learn about the larger world of money and how to make your money work for you. Here you can find advice and calculators for investment and retirement, and a handy link to FederalReserve.org.

The government’s financial education site covers key areas of personal finance.

From choosing a financial institution to managing a business, help yourself to free advise from the U.S. Federal Reserve.

Three Simple Financial Skills To Learn In 2015

Did you read our blog post on personal finance New Years resolutions, think “But these are haaaaaard,” and then just ignore them?

First of all, how dare you?

Second, well fine then! We made a quick list of some even easier financial resolutions you can make,

Balance your checkbook

A lot of people think that balancing your checkbook only refers to keeping track of the checks that you write.

Wrong.

Balancing your checkbook isn’t just about checks; it’s about keeping track of ALL of your financial transactions.

In fact, the most difficult part of keeping this resolution is getting into the habit of writing everything down. The only way for balancing your checkbook to work correctly is if you’re accurately tracking everything.

Then it’s just a simple matter of comparing your ledger against your bank statement. It’s a great way to check for any errors the bank may have made, and helps you keep yourself constantly up to date with your finances.

Learn to calculate a tip in your head

If you don’t know how to calculate a tip in your head, you basically have three options:

1. Have someone else at the table handle it, which puts you at their mercy, so you’re not going to do that.

2. Bust out your phone to use the calculator, which you’re not going to do, because, come on, you’re not gonna do that, which leaves you with just one option:

3. Wing it. Just pick a number that feels right and put it down. Could be too much, could be too little. Don’t know, don’t care.

The thing is, though, calculating the tip in your head is VERY easy. Here’s a breakdown.

The simplest percentage to figure out is 10%. All you have to do is move the decimal point in the price one space to the left. So a 10% tip on a bill of $45.93 comes to $4.59.

And if you want to tip 20%? Just move the decimal over one space and then double the result. Have terrible service? Move the decimal over and cut the result in half. Boom, 5%.

Do your own taxes

Ah, taxes. The annual ritual that all Americans have the shared pleasure of completing before April 15.

Here’s the thing: If you’re someone who has a family, or owns a business, or has some unique financial situation, then, yes, you may want to get a little help with your taxes.

On the other hand, if you’re single and just have your basic 9-5 job, your taxes aren’t going to be that complicated.

You can easily complete them on your own with the help of a free federal filing service like TurboTax, which also has the option to file your state taxes for a small fee.

However, if you feel like doing the whole thing for free, use Turbo Tax for your federal return, and then a government filing service for your state return. A little Googling should help you find your state’s service.

The only issue with doing it that way is that you basically have to input everything twice. It can be a bit of a pain, but that’s more money for you in the end.