Monthly Archives: December 2014

Are You Spending Too Much?

It is very easy to spend a lot more money than you should. Between ATM cards, credit cards, and online shopping, it seems that your money leaves your bank account automatically (actually, it sometimes does)! The point is to make sure that you are spending and saving money on the things that are important in your life. Here are a few ways to make you more aware of what you are spending your money on and to help you cut back:

Use Cash: If you use either an ATM card or credit card for purchases then it is harder to feel when you give up your money. By using cash it forces you to think about your purchases, especially a larger purchase.

Groceries: It is surprising how many store brand products there are that are less expensive and similar in quality to the name brands. A good example of a store brand is cereal, and you may find that you actually like the store brand better! I remember when I was a kid there was the “No Frills” brand, and my mom used to purchase the No Frills iced-tea mix. Whenever I had friends over they used to love the iced-tea and they had no idea what the brand was. Beware that cheaper isn’t always better though and know when it makes sense to buy the higher priced goods, such as with garbage bags.

Automobile: A lot of money is spent on automobiles that can easily be above our means. You don’t have to drive around a clunker, but maybe just tone it down and drive a middle-priced model without features that you will never use anyway. You may even save on insurance premiums.

Repeated Small Purchases: Not only do the larger purchases have an impact on your finances, but so do the smaller everyday purchases. You would be surprised if you added the annual cost of these purchases. For example:

Lunch: At around $10 a day, 5 days a week, this adds up to around $2,500 a year.

Morning Coffee/Snack: It depends where you go, and at $5 a day, 5 days a week, this adds up to around $1,250 a year.

Car Washes: A $10 weekly wash will add up to around $500 a year.

We all have to spend money to live our lives, but if we are more aware of the spending decisions we make, even small ones, then this will help us to prioritize where our money is going. Even minor changes such as one less lunch purchase a week will save round $500 a year, which can be saved for your retirement, educations funds, or other important long-term goals.

Your IRA is a Tax Time Bomb

Individual retirement accounts, also commonly referred to as IRA’s, are a great way to save for retirement and potentially reduce your current taxes. Although these benefits are great, there is a tremendous downside that can impact you if you make a wrong move.

Early Withdrawal Penalty: If you need to withdraw money from your IRA before you are 59 ½ or if you do not meet the exceptions to withdrawing early, then you will owe a 10% penalty, plus income taxes on the amount withdrawn. Depending upon your tax bracket and when considering state taxes, the taxes and penalties for an early withdrawal can equal about 50% of the amount withdrawn.

Required Minimum Distributions: Once you reach age 70 ½ you must start withdrawing from your IRA the following year. If you do not take the required minimum distribution then you will be subject to an excise tax of 50% of the amount you should have taken.

Improper Rollover: You can rollover your IRA to another IRA or a qualified retirement, such as a 401(k) plan without penalty. The problem arises if you withdraw funds from your IRA and do not place them in another IRA or qualified plan within 60 days. If this happens then the amount distributed will be considered taxable distribution and may even be subject to the 10% early withdrawal penalty.

There are other mistakes that can easily be made, such as not choosing a beneficiary or not making contributions to your IRA. The good thing is that there are tremendous benefits that an IRA offers, which we can save for another article.

The Smartest Money You Ever Spent

Spend, spend, and then spend some more. We all spend money, but what if we looked at spending money in specific ways to earn more money and improve our lives at the same time? Although not usually considered investments, there are ways to spend money to earn more.

College Education: The cost of college has steadily increased over the years, but it is still a good investment. Typically, people with college degrees earn more money and have lower rates of unemployment then those without a college degree. The same is true for advanced degrees. Even if you have to take out student loans, you usually are able to pay them off over a very long period of time, which provides you the opportunity to pay off the balance in small increments, while increasing your earnings at the same time. Beware that you must carefully choose a major, the appropriate school to attend, and make the right career moves.

Training & Education: While this may not entail going back to college, you always need to update your skillset and knowledge. It can be training seminars, classes, courses, and even self-study materials and books. This will make you more valuable to your employer, or to your customers if you are self-employed.

Business Spending/Investments: As a business owner, if you wisely spend money on productive employees, equipment, and marketing, then this will increase your chances of higher profits. Consider this: if you hire a salesman and pay him/her $50,000, and they increase sales by $350,000, then that is a seven-fold return on sales. If your profit margin is 20% before the cost of the salesman, then your return on your investment is 40%. Try to achieve a return like that in the stock market!

It’s easy to get wrapped up into spending your money on the wrong things, while spending money on the right things will greatly help you out financially and otherwise.

Common Questions & Answers

Tax season is just about upon us, and here are some common questions our clients have:

Q: Does an extension also extend the amount of time I have to pay my taxes?

A: An extension only extends the amount of time to file your return, but if you owe taxes, then you will incur penalties and interest for late payment of taxes. In NJ, if you do not pay 80% of your tax liability on April 15th, (100% for NY) then your extension will be disallowed.

Q: Is it better to file a separate tax return from my spouse?

A: Also known as “Married Filing Separately,” usually results in a higher amount of taxes being paid, but can be advantageous in certain situations. We always do an analysis to see if this is better for our married clients.

Q: Do I have to make estimated tax payments, and if so, why?

A: Usually self-employed taxpayers, retirees, and anyone who has income from sources that do not have taxes withheld are required to make quarterly estimated tax payments. If you need to make estimated payments and do not, you may be subject to underpayment penalties.

Q: Can I claim my elderly mother or father as a dependent?

A: Possibly. Certain rules have to be met, such as the amount of support provided and their gross income (the definition of gross income would take up half of this article). Interestingly, your parents do not have to live with you.