As we move through life, we get bogged down with day to day activities and might find that small pieces of our financial puzzle get neglected. These neglected areas can have a negative impact on our ability to meet our goals. If you can positively answer the ten questions below, you are certainly putting your best financial foot forward.
1. Do you know where your money goes every month? Folks that understand their income and expenses have a better opportunity to make sound spending and saving decisions. I’ve heard many times from new clients that they are happy with their income but don’t know where their money goes every month. Creating a picture of income and expenses gives one clarity and opens the door to real financial growth.
2. What’s on your credit report? Knowing the contents of your credit report can help protect your financial backside! With the growth and ease of electronic communications today (email and internet) more and more people are at risk of financial fraud. Vigilant behavior is one the best offenses to defend against financial fraud. Another benefit of understanding your credit report is the ability to position yourself as a viable candidate for a loan if needed. Today, this is more important than ever with mortgage lenders ratcheting up lending standards. Mortgage rates are low and real estate prices are ripe for the picking, but a great credit score is needed to get the lowest mortgage rate.
3. Do you know where your important financial documents are and what they say? Your financial documents are vital to your success, but it’s not the documents themselves that are important. It’s what the documents state that is important. If you don’t know where they are, you probably don’t know enough about the information they contain. The exploration and discovery of your important financial docs will help illustrate your financial health. Once you find them, dust them off and read what they say.
4. Are your Estate Planning Documents up to date? Obviously, this question goes hand and glove with question #3. Estate Planning techniques and tax laws are constantly changing, so older legal documents may not serve the original purpose. The fiduciary appointments (executors, personal representatives, guardians, trustees…etc.) inside these documents may no longer be the appropriate choice. It’s important to review estate planning documents every 3-5 years or upon a major life event such as birth, marriage, death, or divorce.
5. Do you know how much you pay in taxes? While the exact answer to this question is not the purpose, the overall goal is to understand that taxes are usually the single largest recurring expenses for most folks. Understanding the magnitude of taxes on your overall financial health is vital, so maximizing tax efficiencies should be an integral part of holistic planning.
6. Are you living within your means and savings at least 10% of your income? This question is similar to question #1 but goes a step further. Knowing where your money goes is important, but doing the right thing with your money is crucial. Spending less than you earn and saving 10% of your income is pinnacle to spur financial growth.
7. Are you balanced financially between today and tomorrow? Are you eating rice and beans today so that you can eat filet tomorrow? Are you savings everything for retirement, or are you spending your earnings as quickly as it hits your pockets? A financial lifestyle based on a lop-sided view will lead to financial dysfunction. So, while saving all your nuts and berries for tomorrow may seem like a great idea, the reality is the mental dysfunction of hoarding may lead to less enjoyment of the nuts and berries later. Creating balances between today and tomorrow will help to balance life’s ups and downs, as well as establish a healthy approach to growing wealth.
8. Do you have an investment plan in place? Are you just throwing money at the market? Do you rebalance your portfolio at least annually? Is your portfolio properly allocated based on your personal risk profile? An investment plan will address the above questions and deliver guidance during turbulent market environments. A financial plan without an investment plan is like a ship without a rudder.
9. Do you have the proper amount of liquidity? Liquidity is the keystone of the financial foundation. Liquidity is the cash that delivers stability during an economic hardship (job loss, unemployment, or natural disaster) enabling one to withstand the hardship without irreparable financial damage. The old adage of 3-6 months of living expense may or may not be enough. Every situation is different and should be assessed individually.
10. Do you know what your insurance deductibles are? If a rock broke the windshield on your car, would you know if you are covered? If a tree fell on your roof, do you understand how the insurance company will determine the amount of your payout? Insurance deductibles are a great place to start when looking to understand your coverages. Is your insurance deductible right for you? Is it too high….Is it too low? Remember, lower deductibles increase premiums!
These ten questions are broad questions that point to the importance of a total financial plan (holistic planning). While there are other questions that may be important, this list is a good start to give yourself a quick check-up while searching for any missing financial puzzle pieces.
Monday, June 28, 2010
Tuesday, June 8, 2010
Goldilocks and the Three Tax Preparers
Once upon a time there was a small business owner named Goldilocks. She owned a business in the woods. As a small business owner, she was subject to self employment tax and was required to make estimated payments.
One day an ill-informed tax preparer knocked on her door. The taxman told Goldilocks that she need not be concerned about making her estimated payments to the IRS. Goldilocks loved the idea and followed his advice to the letter. All year long, her business made money and grew, and all year Goldilocks neglected the pay- as –you-go tax system and lived happily spending the money she earned.
The pay-as –you-go tax system was established for those who are self employed. Each quarter the IRS requires an estimated tax payment for the tax due on income. Neglecting these payments may result in an underpayment penalty at tax time!
Goldilocks enjoyed the fruits of her labor throughout winter, but then spring arrived. Goldilocks was shocked when she learned that she had a huge tax bill due, including an underpayment penalty. Goldilocks thought her prior year’s tax planning was “too cold” and decided to revisit the estimated payment idea.
A few weeks later, an over-anxious tax preparer arrived at her door. This conservative preparer told Goldi to send big chunks of her income into the IRS. While Goldi slept a little better at night, her disposable income was negatively affected…..she didn’t have money to spend.
After a year of this method, Goldilocks completed her tax return and learned she was due a huge refund. While the idea of a large refund made her happy, she realized the money she paid to the IRS was being returned to her without any interest. She thought this method was “too hot!”
Any money paid into the IRS and then returned to the taxpayer will be returned without interest. In essence, overpayments are equivalent to an interest free loan to the government, so large refunds are not always the most efficient use of hard earned money.
Goldilocks was upset that she mishandled her taxes the last two tax years. She didn’t know what to do. While sitting and thinking about her options, a new tax preparer appeared at the door. This preparer sat down with Goldilocks and discussed her situation. They talked about her income and expenses and created a projection of her current year’s tax liability. This projection was used to determine the estimated tax payments Goldilocks needed to pay for her current tax year.
After a year of pro-active tax planning, Goldilocks was excited to see that at tax time her estimated payments were not “too hot” or “too cold”….they were “just right”!
Moral of the Story
It is important not to over or under pay estimated tax payments. Merely taking a guess can create a bad situation. Underpayment penalties really are easily resolved through proper planning. Overpayments are not the answer either, because no one wants to give the government a big interest free loan. Creating a balance between tax payments and retaining liquidity for current cash flow is truly the Goldilocks’ scenario in which tax planning is “just right.”
One day an ill-informed tax preparer knocked on her door. The taxman told Goldilocks that she need not be concerned about making her estimated payments to the IRS. Goldilocks loved the idea and followed his advice to the letter. All year long, her business made money and grew, and all year Goldilocks neglected the pay- as –you-go tax system and lived happily spending the money she earned.
The pay-as –you-go tax system was established for those who are self employed. Each quarter the IRS requires an estimated tax payment for the tax due on income. Neglecting these payments may result in an underpayment penalty at tax time!
Goldilocks enjoyed the fruits of her labor throughout winter, but then spring arrived. Goldilocks was shocked when she learned that she had a huge tax bill due, including an underpayment penalty. Goldilocks thought her prior year’s tax planning was “too cold” and decided to revisit the estimated payment idea.
A few weeks later, an over-anxious tax preparer arrived at her door. This conservative preparer told Goldi to send big chunks of her income into the IRS. While Goldi slept a little better at night, her disposable income was negatively affected…..she didn’t have money to spend.
After a year of this method, Goldilocks completed her tax return and learned she was due a huge refund. While the idea of a large refund made her happy, she realized the money she paid to the IRS was being returned to her without any interest. She thought this method was “too hot!”
Any money paid into the IRS and then returned to the taxpayer will be returned without interest. In essence, overpayments are equivalent to an interest free loan to the government, so large refunds are not always the most efficient use of hard earned money.
Goldilocks was upset that she mishandled her taxes the last two tax years. She didn’t know what to do. While sitting and thinking about her options, a new tax preparer appeared at the door. This preparer sat down with Goldilocks and discussed her situation. They talked about her income and expenses and created a projection of her current year’s tax liability. This projection was used to determine the estimated tax payments Goldilocks needed to pay for her current tax year.
After a year of pro-active tax planning, Goldilocks was excited to see that at tax time her estimated payments were not “too hot” or “too cold”….they were “just right”!
Moral of the Story
It is important not to over or under pay estimated tax payments. Merely taking a guess can create a bad situation. Underpayment penalties really are easily resolved through proper planning. Overpayments are not the answer either, because no one wants to give the government a big interest free loan. Creating a balance between tax payments and retaining liquidity for current cash flow is truly the Goldilocks’ scenario in which tax planning is “just right.”
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