Listen to your accountant!

When talking about my job / anything that relates to taxes to family and friends, I’m used to the blank stares, glazed-over eyes and the occasional unconvincing “Oh, wow”. But as the up-coming presidential election gets closer and closer, paying attention to what accountants are saying is something all taxpayers should be doing. Why? I’m glad you asked.

Back when George W. Bush was president, tax cuts were passed that favored individual taxpayers (known as the “Bush tax cuts”). These tax cuts were first set to expire at the end of 2010, but because of the state of the economy at the time, legislators were influenced to extend the Bush tax cuts to the end of 2012. During a time when we had a Democratic president but saw heavy Republican victories in the midterm elections, the extension of the Bush tax cuts was seen as a major political compromise.

However, as we are nearing the expiration of the extended Bush tax cuts at the end of 2012, tax analysts do not see a similar compromise this year as a likely scenario. Because of the up-coming election, improved unemployment rates and increasing attention to the climbing national debt figures, it’s unlikely legislators will extend the Bush tax cuts.

Bored yet? If you’re still with me, this is when all of this will hit home: if the Bush tax cuts do not get extended, starting on January 1, 2013, individual income tax rates will return to where they were before the tax cuts. See below for a table summarizing the rate increases:

Current rates – under the Bush tax cuts Rates schedule for 2013 – if Bush rates expire
10%; 25%; 28%; 33%; 35% 15%; 28%; 31%; 36%; 39.6%

In addition, we’ll no longer enjoy the lower tax rates on dividends and long-term capital gains. Currently, these are taxed at either 0% or 15% (based on income level). However, if the Bush tax cuts expire, qualified dividends will be taxed at the ordinary income rate (shown above) and long-term capital gains will be taxed at 20%.

So what does all this mean? Well, to some people, it might mean nothing. But to most people, it might mean a lot. If you’re interested in learning more, talk to your tax accountant. In the meantime, to read more about these and the other preferential itemized deductions and tax credits that will expire with the Bush tax cuts, check out these articles by Forbes, CNN Money and The New York Times.

Saving Made Simple

I just want to put this out there:

There, I said it. Consider yourself officially warned.

If you’ve decided to continue reading (thank you!), I’m sure you’ve guessed my post this evening is about finance. Specifically, personal finance. I’ve been thinking a lot about my family’s finances lately, and I’ve found a lot of my conversations with friends and family have been going in the direction of saving, budgeting and cost-cutting tips. I don’t know about you, but everything I heard about bail-outs, unemployment and our crumbling economy over the last few years has sent the frugal part of my brain into overdrive. I wouldn’t exactly consider myself a “spender”, but I can’t say I’ve always been the “saver” I want to be either. In a perfect world, money experts recommend that we save between 10-20% of our after-tax income. But, alas, this is not a perfect world: according to the most recent studies, Americans only save about $.05 of every $1.00, or 5% of their after-tax income. That’s up from our negative savings a few years ago (yikes!), but still not where we should be.

So, a couple of months ago, my husband, Ryan, and I modified our budget to cut out some spending and increase our saving. But as everyone knows, saving money isn’t always easy. I’ve read various articles on tips and strategies for saving money, but we hadn’t found a system with which we were totally comfortable. Through trial and error, we’ve come up with several saving strategies that we’ve been successful at following. While everyone’s approach to money is different, I think these strategies can be adjusted to fit numerous personal finance styles (with as little pain as possible).

Savings Strategy # 1 – Break It Down. No, I don’t mean on the dance floor (ha…ha): break down your savings goals in manageable sizes. Whatever manageable means is up to you. Here’s how I do it: First, set a savings goal (“I need $2,000 for our vacation next summer.”). Then, taking into consideration how much time you have to save, calculate how much you need to save monthly to reach your goal (“For the next 10 months, I will need to save $200 per month to reach my goal.”). If you’re completely, 100% comfortable with the monthly number (and know beyond a shadow of a doubt that you will save that amount each month), go ahead and start saving! However, if you’re like me and feel more comfortable with smaller amounts coming out of your checking account, you should next calculate what you need to save per paycheck (“If I continue to get paid twice a month, I will need to save $100 per paycheck to reach my goal.”) Ah, much better. If you want, break it down even further to a weekly savings target (“If I save $50 each week, I’ll reach my savings goal for vacation.”). Even though the math gets you to the exact same place, savings $50 a week seems much more manageable than one big withdrawal of $200 per month. Simple, but it works!

Savings Strategy #2 – The Round Down. Every Sunday, round the balance in your checkbook down to the nearest hundred-dollar amount. For example, if the balance in your checkbook is $563.10 on Sunday, round it down to $500. Write a check to yourself for the “round down” (in my example, $63.10) and stash it in a safe place. Even if you only round down an average of $20 per week, you’ll have over $1,000 saved in one year ($20 per week x 52 weeks = $1,040). If a weekly round down is too much to start off, try doing it once or twice a month. This is a great way to save for expenses that depend on how much you save (like Christmas and spending money for a trip).

Savings Strategy #3 – Automate. Unfortunately, left to my own devices, I wouldn’t save nearly as much as I would like (or need). My solution to this is both convenient and simple: set up automatic transfers that take a set amount of money from my checking account and deposit the cash into various savings accounts. All the work is done one time, and I don’t have to remember to go into my online banking sites to transfer money into savings. Start with a small amount and work your way up. Once you see the balance in that savings account going up, your sense of accomplishment will trigger the desire to save more.

Savings Strategy #4 – Inconvenience Yourself. While I am normally an advocate of multi-tasking and streamlining tasks, when it comes to saving, I’ve found one of the best ways to save a large chunk of money is to take away the convenience of accessing that money. Online banking rocks in so many ways (for instance, it allows me to balance my checkbook everyday…yes, I do that), but there is one pitfall for me:  I can transfer money out of my savings and into my checking account with the click of a mouse. And I can do this at anytime, from anywhere. Ah, the convenience of technology.  However, if you were to add driving to the bank, standing in line and going through a teller to do that same transfer, it instantly becomes less appealing. The result: I’m less likely to touch the money in my savings account. This self-inflicted “cooling off” period works well for any kind of savings account, but it’s especially effective for emergency savings accounts or other savings accounts in which you want to build up a sizable balance (such as saving for a down payment on a house).

Had enough financial talk for one day? 🙂 Hope everyone has a wonderful weekend!