Do Your Taxes (FAFSA Edition)

This tax post is for FAFSA filers old and new; includes parents of this year’s college seniors and parents of students in college now.

It’s a good day to…”Do Your Taxes”. Or at least generate a decent estimate.

Tax Forms 1040

Who should do an estimate by January 1st?

1. Parents of high school seniors off to college next year
2. Parents of current college students
3. Self employed people
4. Taxpayers with a change in income, plus or minus 20%+ over last year.

This post focuses on FAFSA filers…
Experienced FAFSA (Free Application for Federal Student Aid) filers know the joy of spending a part of the upcoming holiday weekend on personal finance and disclosing your finances to another government agency. I invite you to include your high school senior/college student for part of this exercise so that they understand that they aren’t the only ones who have to fill out forms so that they can go to a post-secondary educational opportunity. Some reasons to do so:

Funding college can feel like this!

1. If the family won’t be eligible for college aid due to the family income or assets, they need to see why.
2. If the only way they can go to college is due to a lack of resources, they need to understand the forms and their importance.
3. This is a good time to remind them to seek scholarship applications-many open up January 1st of each year.
4. Review your in-house rules for having “skin-in-the-game”. For instance, We expect you to earn/contribute $5000/yr towards this cost. Or you need to apply for X number of scholarships.

Note 1: The FAFSA asks for many pieces of financial information and despite the requests for early completion, most people have not even thought about their tax filings on New Year’s Day of any year. For divorced parents, it is good to communicate in advance about the required information.

Note 2: It is always recommended to complete the FAFSA, even if you think your family will not be eligible for any aid. In the coming year, there might be some program that requires the FAFSA, despite no financial aid award now.

Deadlines

Complete the FAFSA as soon as possible-your place in line matters for aid awards. This applies to federal and private sources of funding. A list of deadlines are here.

You can order a PIN to sign the FAFSA now at https://pin.ed.gov/PINWebApp/pinindex.jsp .

Print some tax forms. (for notes and listmaking) Choose an online tax calculator such as http://www.ownersmanualdownload.net/moneychimp-tax-calculator-2014 or http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx. Please note, these are for illustrative purposes only. The idea is to choose one that is easy for you to work with. Please use your favorite search engine to select one for yourself.

 

Get ‘er done!

 

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Hire a Professional: 6 Steps to Prepare

One of the most common questions every financial adviser hears is,”What shall I bring to a meeting?

In order to maximize your time with a professional (visit www.letsmakeaplan.org to find a CFP® ), I suggest six steps to take first:

 

1. Pull a truly free copy of your credit report at www.annualcreditreport.com  (your scores are based on the report information)

2. Pull a copy of your accrued Social Security Benefits ( Yes, you will be able to receive a benefit in the future)

3. Gather up your employee benefits books or intranet site, last year’s tax return (first two pages is a good beginning) and any company retirement plan/bank/credit card/student loan statements.

4. Write down some family lessons that you learned about money (take 5 minutes and see what you come up with). For example, never borrow money, save 10% of everything, always buy on sale, etc. Walking up and down every grocery aisle was one of mine.

5. List your expenses (all of them), and then your income. See how they match up to the 50/30/20 rule. 50% needs/30% wants/20% savings.  (from the book called All Your Worth by Warren and Tyagi)

6. What are your financial hopes and dreams? Retire at 50, travel around the world for one year, start your own business…do share those with your adviser as well.

Now you are more knowledgeable about your financial past and present, so that you can use a professional to discuss your financial future.

PS: You may decide to interview more than one person. Prepare these items and see who asks questions on any of the topics.

Walden on Wheels # 2: Van Dwelling Grad Student

To save money, Ken Ilgunas lived in his van ( “an upholstered hermitage” ) while he attended Duke to get a Masters in Liberal Studies…and kept it a secret. Ken Ilgunas is the author of Walden on Wheels. My earlier post addressed the first half of Ilgunas’s story-how he got rid of his undergraduate loan debt.

“The Creepy Red Van”

He made several pledges to himself:

• First: “In order to live debt free in my van, I’d have to lie”. The first rule of van dwelling-is don’t mention the van dwelling.
• Second, he vowed not to accept any gifts, even though his mom offered to pay his rent so he didn’t have to live in the van.

“I didn’t think of a gift merely as a gift but as a debt with bow wrapped around it.”  “When we accept a gift, I thought, sometimes we don’t just acquire a debt but an identity.”

• Third, he continued his life as an ascetic by giving up meat, dairy and beer; and joining the campus gym (for exercise and showers) . [I say ascetic for his purposes-not everyone who gives up meat is an ascetic].

The burden of lying by omission to fellow students about where he lived and being worried about whether the campus police would kick him out of his permitted parking space took a distinct toll on Ilgunas’s social life. After two months like this, he had a  “surfeit of solitude”. When you read the book, you can see how he solved that problem.

In addition, he was living on $103/week, not counting tuition and other school fees. According to charts in the book, he spent $4.34/day average on food. For reference, the dollar amount for a person using SNAP (food stamps) is $31.50 per week or $4.50/day.

(Photo credit: Wikipedia)

As listed in the book, his monthly expenses consisted of: car insurance $46, entertainment $33, vehicle costs/repairs $73, gas $23, misc. $65, food $132, cell phone $37.

Notice: no utility expenses, nothing on clothes, no long commute.

You might take a moment to jot down your own expenses and see if there is any place to cut without being as Spartan as Ilgunas. What I learned from the book is that many of us with  “first world problems”, live a relatively easy life. For those of us with larger debts, Ilgunas demonstrates the value of being absolutely focused on one’s priorities and ultimately learns another lesson as well:

“If I wanted to stay close to nature and my true needs, I would have to continue to live a bare-bones, simple uncluttered lifestyle.”

Without adopting a ‘bare-bones’ lifestyle, there is value in seeing how others accomplished their goals. J. D. Roth, the founder of the finance blog Get Rich Slowly wrote about getting rid of his $35,000 in debt in 2007. Whether you choose to stop using credit;  adopt a lite beer vs. microbrew budget; sell most  of your possessions ; leave the country; or live on only one income (if your family has more than one revenue stream), there are other people who have vanquished their debt. It is very hard, but you are not alone (unless you want to live in your own van).

Related articles

• Dorm, Shmorm: Meet the Guy Who Lived in a Van for Two Years During Grad School (business.time.com)
• Walden Pond in Concord, Massachusetts (atlasobscura.com)

Payroll Tax Holiday to end in 2013

I read that line about the “payroll tax holiday” last year  in my hometown newspaper. Holidays have to end, after all.

Why do people like to complain about Social Security and the payroll tax?  Some of them are free-market purists, Libertarians, lobbyists, and others who believe that everyone in America can succeed without any government support whatsoever. If you believe that all taxes are ‘confiscatory”, please read no further.

However, I haven’t met any people over 65 yet in the last 25 years who are not claiming their Social Security benefits. Well, there is that one family member who believes that people make rational decisions, all the time. But I digress.

The sub-headline could also have read:

Americans to resume full contributions to Social Security accounts in 2013.

Most of the people I speak to professionally are very appreciative of a lifetime annuity plan, with a cost of living increase, where they don’t have the worry of investment management. (Yes, Virginia, Social Security is that). For many older baby boomers, it will be the only plan like that they ever have. 

Before You Quit Your Job-Five Factors to Consider

Want to stop working for The Wo[Man]?

Ready to strike out on your own? Push coming to Shove?

Going on sabbatical?

What are the five most important financial factors? Answers will vary, however these five are important. A conversation at my coworking space prompted this post. Another member told me of their wish to leave their day job and I began to ruminate.

As Ben Franklin might have said, the first three questions are: [are you]

1. healthy,
2. wealthy,
3. and wise (human capital)?

Two factors added from the intangibles column makes five.

4. Go towards the next destination, instead of “getting out of Dodge in a hurry.”

5. Use a road map, instead of wandering aimlessly on the side of the road, trying to hitch a ride. As Lewis Carroll wrote and George Harrison sang,

“If you don’t know where you are going, any road will get you there.”

One by one, here’s how to assess your readiness to move forward. A worksheet that I like to use with my clients can get you started on the big picture.

Pro Athlete Financial Losses (and how you can do better)

Financial losses by professional athletes are in today’s news a couple of times a year, it seems. It’s both sad and frustrating to read about pitcher Curt Schilling and quarterback Mark Brunell, two former professional sports stars in the media for losing much of their sports-related earnings. Schilling, (a video game entrepreneur-38 Studios), told a Boston radio station recently that he may have “lost all the money he saved from playing baseball.” Brunell lost millions in commercial real estate and a “Whataburger”.

A Whataburger restaurant. (Photo credit: Wikipedia)

When one can lose $50,000,000 to $75,000,000 before age 50, that’s an extraordinary achievement. Most of us won’t make that much in a lifetime, even if we count the entire family. To put $50,000,000 in perspective, if you lived to age 82, it would mean that you had $1670 to spend every day of your life.

Mark Brunell (Photo credit: mlgkhc)

In reading the Seattle Weekly article about Mark Brunell, I learned of Ken Ruettgers, a former Green Bay Packer and his business of counseling players after the NFL.

On his finances page, Ruettgers has 5 “Reality Checks”, one of which is “get help”. Another one is “downsize.”

Those are useful reminders, rules and habits. However, the rule that these athletes both ignored was to pay yourself first. That bears repeating.

Pay yourself first.

When you get your first job, pay yourself right away, before you pay the bills. Your future is the most important bill. Don’t wait until the end of the month. If you can go through your entire working life living on 90% of what you earn, you have given yourself a terrific boost. This is ten percent of your take-home pay, mind you – in addition to any other employer contributed funds, pension benefits (ha) , bonuses etc.

Ten percent of Curt Schilling’s lifetime earnings in baseball is $11.4 million. At the conventional “safe withdrawal rate” of 4%-that is $38,000 income per month (before taxes).

Even if you don’t have the millions of a Schilling or a Brunell, you can follow the rule above.. If you can’t begin with ten percent contributions to savings, pick a lower number and promise yourself that you will increase it regularly. this is how you will do better than the millionaires. Remember:

• Pay yourself first
• Downsize
• Get help

(I’m sure that each of these athletes saved money along the way, but apparently those funds were not set aside in a way that would ensure their families’ financial security even if other business efforts failed.)

Related articles

• Curt Schilling And Why Athletes Make Such Poor Financial Decisions (forbes.com)
• Money Lessons from an ‘Ultimate Fighting Champ’

From the article above: “Financial advisers generally recommend allocating the lion’s share of your wealth to traditional asset classes such as stocks and bonds, and devoting only a small portion to real estate and alternative investments such as private equity. Yet athletes often do the reverse.”

$40 Story-Shortchanging U.S.?

For the math alone, I agree with the extension of the payroll tax cut. It is a great way to place 160 million times $1,000 into the economy, automatically. For most people, the periodic extra $40 will go right back into their neighborhood businesses, or maybe just to their gas stations.

However…

This is a short-term fix for a long-term problem.

What are the long-term losses for the rest of us?

 

• Now both houses of Congress know that the payroll tax (Social Security can be played for political gain.  Is the “third rail” gone? As Senator Harkin said yesterday,

“I never thought I would have to see the day when a Democratic president of the United States and a Democratic vice president would agree to put Social Security in this kind of jeopardy,” exclaimed a visibly agitated Harkin from the Senate floor. “Never did I ever imagine a Democratic president would be the beginning of the unraveling of Social Security.”

• Restoration of these contributions (or payroll taxes) is now positioned as a tax cut on the middle class (as opposed to a contribution to a valuable old age and retirement insurance program).

• If you don’t need the $40 now, are you saving this money for the long-term? Did you increase your contributions to your 401(k) this year?

• How does this cut affect the health of the Social Security program as a whole? According to the White House, it doesn’t.

Alicia Munnell, of the Boston Center for Retirement Research (BCRR) has a sensible suggestion for restoration of the cut here.

As a financial advisor, I can tell you that the retirement age clients I have met with in the last six months are extremely grateful for their Social Security income. If you look at it as a proxy for a pension or annuity, the perceived value in your portfolio goes way up.

When you compare your Social Security income to the downs and ups of the stock market in the last 3-4 years, a staid stable, guaranteed, income for life, for part of your retirement planning begins to look pretty awesome.

Americans are already not saving enough for retirement, and this payroll tax cut doesn’t help us “eat our peas”.