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Spring Cleaning Your Finances

spring cleaning your financesSpring is here, and with it comes spring cleaning.  Every year, I’m determined to get my house in order.  Every year, I fail, mostly because I’m tackling much too large of a task.  But I can break the task down into smaller projects.  This year, one of those projects is to spring clean my finances.  Play along with me and spring clean your finances as well!

Task One – Shred Those Old Documents!

Every so often, various financial paperwork arrives in the mail.  And I dutifully file it away.  (Well, I usually let it pile up, then do a big batch of filing all at once.)  But how much of it do I actually need to keep?

Let’s start with Tax Returns.  You only need to keep 7 years worth of your tax returns.  So all those old folders with your returns and deductions? Put them in the shredder!

How about credit card statements?  Once you’ve passed a year, you don’t need them (unless you need them for tax purposes).  If your statements are available online, you likely don’t need those paper copies at all.  You can either rely on the ability to download them at any time, or you can download them and save them on your computer (though I would recommend making sure your computer is secure and those files aren’t easily accessed – this goes for all your electronic financial documents).  I would recommend still deleting the older files and only keeping those absolutely necessary.

Receipts?  Only keep those for big purchases.  The rest can be shredded once you’ve recorded them in your budget.  No need to keep grocery receipts around forever, after all.

Paycheck stubs?  Keep them for a year, until you get your tax statement from your job at the beginning of the year.  Then shred them.

Task Two – Organize Your Files

Yes, I know, the most dreaded “Spring Cleaning Your Finances” task.  What is your method of storing financial paperwork?  Could it be better?  Now, I’m not saying you need a beautiful filing cabinet with meticulously labeled, color-coded files.  But you do want your paperwork to be somewhat organized.

As I mentioned, I don’t file on a daily basis, or even weekly.  I have a file tray that I pile paperwork in, and then every six weeks or so, I go through the tray and decide what to keep and what to shred, and then how those things should be organized.  I try to keep my categories as simple as possible.  In my file box, I have the following folders:

  • House
  • Car
  • Work (both my main job and my freelance gigs)
  • Pets
  • Current Year Taxes
  • Purchases
  • Bills
  • Medical
  • Other

As I’m prepping for tax season, I go through some of those folders in more detail and decide what needs to be kept and what can get shredded.  It’s not the most sophisticated system, but it works for me.

Task Three – Review Your Budget

The next step in the “Spring Cleaning Your Finances” Plan is to take a look at your budget.  What sort of recurring expenses do you have?  Are they all necessary?  With the prevalence of streaming media, monthly subscription boxes, other paid online accounts, it’s really easy to find yourself spending $100 or more without realizing it.  A $10 subscription box doesn’t sound that bad, and if you enjoy it, it’s certainly worth it, but if you’re suddenly getting two or three of those boxes, that cost is increasing exponentially.  And what about streaming media?  Netflix, Hulu, premium channel accounts, they all add up.  I admit, I subscribe to a few different streaming services, but I’ve made a point to cut down.  I don’t have cable, so these online streams are my main sources of entertainment.

That said, I’ve discovered these accounts are all really easy to cancel and re-subscribe to at any time.  Are you finding yourself not watching very many Netflix shows?  Cancel your account!  Then, when Netflix releases the next season of Stranger Things (or whatever show you happen to be waiting for), you can easily sign back up.  Trust me, they will happily take your money.  Maybe you only unsubscribe for two or three months, but that’s money in your pocket.

Spring cleaning can put money in your pocket in other ways as well.  You may find items you can sell or donate to charity (which leads to a tax deduction if you itemize).  You may discover items you forgot you owned and thus no longer need to buy.  Maybe you’ll simply find peace of mind and a fresh start now that your home is clean and tidy.  Either way, a great first start is spring cleaning your finances.



How to Utilize Aggressive Tax Strategies for a Small Business

We may be facing the end of another tax season, but there are plenty of things that you can do right now to reduce your business income tax for next year. Even though the tax laws could change from one year to the next, these helpful tax strategies should still be effective for most small businesses.

Saving on your taxes can help your business significantly each year. You can help put that money back into your company’s budget and put it toward something that you may need such as equipment upgrades or office furniture.

Here are a few aggressive tax strategies that your company can use to help you save money on your taxes each year.

Use Tax Law Changes to Your Benefit instead of a Disadvantage

Does your small business operate as a sole proprietorship? Are you a limited liability company or a partnership with another business? Regardless of what type of business you own, your portion of the net income generated by the company will be shown on your Form 1040 and taxed at a personal rate. If the individual federal income tax rate is reduced, you will want to think strongly about planning for next year’s taxes and make plans for permanent tax benefits.

If the tax rate is reduced, the common strategy of deferring income into next year while rushing deductible expenses into the current year can help you create a noteworthy tax break.

Use Your Company’s Credit Cards to Your Advantage

Before the end of the year, make a charge on your business credit cards recurring expenses that you would normally pay off at the beginning of the calendar year. You can claim deductions even though the credit card bills will not be paid until next year.

This strategy may not work for everyone, for example, it doesn’t apply to store revolving charge accounts. Therefore, you can’t deduct the business expenses that are charged to a Home Depot or Officemax account until you have paid the bill.

Use a Check to Pay Your Monthly Business Expenses

One trick that you can try is to pay your expenses using a check in the mail. Place your bills in the mail a few days before the end of the year. The tax rules say that you can deduct these expenses in the year that you mail out the check, even if they won’t be cashed or deposited until the following year. For large expenses, send your checks by registered or certified mail, so that you can prove when they were mailed out.

Pre-pay Your Expenses for Next Year

Another tax strategy that many small businesses use is to prepay some of their expenses for the following year in December. This can be effective as long as the financial benefit from the prepayment doesn’t go beyond the earlier of either 12 months after the first date that your company retains the benefit or the end of the tax year following the year in which the payment was made.

An example of this would be, the rule allows you to claim your 2016 tax deductions for prepaid bills in the first three months of the following year. So, you could pay next year’s rent or payment for your small business loans for the first half of the next year.

Remember that it is a general rule for all cash-basis taxpayers that you don’t have to report your income until the year you receive cash or checks in hand or through the mail.

To take advantage of this simple tax rule, send out some of your invoices at the end of the year. That way, you won’t be paid until the early part of the following year, however, don’t try this i9f it raises the risk of you not receiving your payment from clients. While some of these tax strategies may not work for all small business owners, but they are good tips for every business manager to keep in mind.

How Do Income Taxes Work?

how do income taxes workHappy Tax Day!  Because April 15 fell on a Saturday this year, US tax returns weren’t due until April 17th.  But why do we pay our taxes on April 15?  And while we’re talking about it, how do income taxes work anyway?

Federal income taxes were created by the 16th Amendment to the Constitution, which says “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”  The first Tax Day was March 1, 1914, about a year after the 16th Amendment was enacted.  In 1918, it was pushed back to March 15, and then in 1955, to April 15.  The official reason given was to spread out the workload of the IRS employees.  [Source]  Nowadays, many returns are processed electronically, but I can only imagine the amount of work when everyone had to mail in their tax returns.  Just imagine all of that paperwork!

Of course, I’m sure tax returns were also a bit simpler in the 1950’s.  After all, technology and the internet has made banking, investing, and even working much different.  And Americans are apparently very confused about how the US tax code works.  I read an article over the weekend that said that more than half of US taxpayers can’t answer very basic questions about income taxes.  For example, “If you lend money to a friend and she doesn’t pay you back, can you write it off?”  There are conditions and paperwork involved, but in short, yes, you can.  Who knew?

The US began withholding income tax from paychecks during World War II to ensure a steady influx of cash to support the war effort.  [Source]   The amount withheld is determined by your W-4 form, where you add up your allowances based upon some simple questions (single or married, any dependents, etc).  Unfortunately, it’s not a perfect system.  For example, it doesn’t ask you if you own a home and pay a mortgage.  I get a tax deduction both for my mortgage interest and for my property tax, and that means I owe the government less than I did while I was a renter.

There are various calculators online that you can use to figure out how much income tax you should be paying, and thus, how many allowances you should have withheld from your paycheck.  I personally like the calculator created by the IRS.  You can change your W-4 at any time throughout the year.  So if you discover in September that you’ve been having way too much money withheld, you can change your W-4 so that you get more money in each paycheck.

When you file your taxes each April, you’re doing the paperwork to figure out if you owe the government money or if they owe you money.  You calculate all of your income and all of your various deductions, and the number at the end is the difference between what you paid and what you should have paid.  Most people want to get a big refund from the government.  I’ve even heard it referred to as free money.  No!  This is your money that you let the government use for free.  The best tax return is one where your final balance is as close to zero as possible.

My tax return this year was not close to zero, so I’m going to use the IRS’s calculator to make sure that I’m not giving the government a large free loan every year.  I admit, I look at these calculators and think that I would prefer to not do the paperwork.  But I would also like a larger paycheck every payday.

The money from your income taxes pays for all sorts of things around the US and even around the world.  When the annual federal budget is created every year, your income taxes pay about half of all of the expenses.  Sure, it’s annoying to pay taxes, but we would be in a very different world without them.




What to do with a large tax refund

what to do with a large tax refundYour 2016 tax return is due April 18, and by now, many of you have already finished filing your returns.  Why wait til the last minute, especially if you’re expecting a refund?  Let’s say you’re getting a decent amount of money back (more than enough to buy you a meal at a casual restaurant).  What are you going to do with your large tax refund?

First and foremost, pay down those high interest debts, especially consumer debts like credit card balances.  Even if your large tax refund won’t pay off your entire credit card debt, you can make a dent in the total amount owed and reduce the amount of interest you’re paying every month.  And don’t wait until your next statement arrives to make the payment.  Make that payment now.  Interest accumulates daily, so the sooner you pay down the debt, the less you’ll ultimately owe.

How does your emergency fund look?  Do you have money set aside for an emergency such as a house or car repair or an unexpected medical expense?   Different experts have different opinions of how much money you should have set aside.  I’ve read anywhere from 3-9 months of expenses.  Let’s be honest, how many of us have an emergency fund big enough for 9 months of expenses?  But your large tax refund can be used (even if just partially) to build up that emergency fund.  Maybe make a point to put half of your refund into your emergency fund.  Increasing the fund never hurts.

Are there repairs you have been putting off?  Does your car need new tires?  Do you need to replace some of the windows on your house (like I do)?  Do you have some landscaping work that needs to be done? Now’s the time, if your tax refund is big enough.

But none of these things are fun!  You want to be like your friends or coworkers and spend your tax refund on something awesome, like a trip or some expensive electronics equipment or a shopping spree at the mall.  And there’s nothing wrong with that option.  I would caution you against spending your entire refund, and if you have credit card debt, maybe spend very little of it.  (I do believe that we all need a little bit of fun money, after all.)  If nothing else, make a point to spend half and save half.  Even if you’re saving half in your vacation fund, anytime I receive any extra income, I like to put half of it away for the future.  Future me is always thankful when I do this.

Finally, though it seems like a great situation to be getting a chunk of money back from the government every spring, it’s really not.  It’s not free money, it’s a refund.  That means that it’s an amount of money that you overpaid.  The government has been holding your money for you and is now giving it back to you.  It’s like a free loan because you’re not even getting interest on that money.  Instead of getting a large tax refund, wouldn’t it be nice to have that money every month?  Take a look at your withholdings and see if you can change the amount withheld from your paychecks.  Even if you just stick the money into a savings account, with interest, you will have even more money next tax season than you would have received in a refund.


How Much Interest Does One Million Dollars Earn?

how much interest does 1 million dollars earnWhen I started saving for retirement, I wasn’t sure how much money I should save, so I set my first milestone at one million dollars.  I’m not there yet, but I’m working on it.  Of course, the more I save, the more I earn in interest.  But how much interest does one million dollars earn per year?

Well, that all depends on your interest rate.  If you can match the average annual inflation rate, which is around 3%, you can earn around $31,400, if your interest rate compounds monthly.  (At that rate, you can double your one million dollars in just under 25 years.)

But how do you get that rate?  Right now, US interest rates are relatively low.  They’re rising, but they’re still low.  Low interest rates are great when you’re getting a mortgage, but they’re not great when you’re trying to get your savings to grow.

Right now, a one year Treasury Bond is at about 1%.  That’s not great.  So one million dollars would earn about $10,000 in interest in a year.  That’s not bad, but you can do better.

I do online banking at Capital One 360 (formerly ING Direct), so I took a look at their rates to figure out how much interest one million dollars could earn there.  It looks like I could get a 1% rate on a Money Market account, but I could get 1.3% on a 12 month CD.  That takes me up to an interest rate of $13,000 per year.  Not bad, and pretty darn safe.  If I’m willing to put my money away for longer, I can earn a higher rate, but rates are relatively low right now and should continue to go up, so locking away my hypothetical million dollars for more than a year isn’t the best plan.

To really make my money work for me, I’m going to have to do more than stick my money into a savings account.  It’s time to look into investing your money.  Personally, if you are looking to invest that much money, I would recommend finding a financial advisor to help you with your decisions.  It will cost you some money, but I think it’s a worthwhile expense.

Were I not using a financial advisor, I would first look into mutual funds.  A mutual fund is a collection of stocks, bonds, and other securities packaged together into a portfolio.  These are managed by portfolio managers, so with a mutual fund, you do pay extra for that work.  But the benefit here is that the portfolio managers buy and sell securities for the portfolio and work to ensure that each shareholder’s investment continues to grow.

So to answer the question of how much money does one million dollars earn in a year, the answer is “It depends.”  You can easily earn $10,000, but with a bit of work, you can earn quite a bit more.  And remember, for each year that you continue to save, your money will continue to grow.  And if you’re like me and still working towards your first million, remember the value of compounding interest.  Instead of pulling that interest out and spending it, let it continue to grow.  Your money will grow, interest rates will grow, and by the time you reach retirement age, you will hopefully have a nice sum of money to spend as you enjoy your life.