Taxes

This time instead of discussing debt, we will take a look at income tax, January and February are the two months when the majorly of Americans’ attention turns to another aspect of finance; namely taxes.

The question is, what are taxes?  

Definition of tax: a fee charged or levied against a process, product, and license.

There probably is not a day that goes by that you do not pay tax on something. A couple examples of these taxes are: cigarettes, tax on food when you eat in a restaurant, gasoline tax, taxes on movie tickets and sporting tickets. These give you how vast the field of taxation is in this country.

The taxes on ones paycheck are the ones that effect the individual the greatest this time of year. In most cases, the items mentioned in the chapter on income are taxed.

How does one prepare for annual income tax?  If you are starting to gather data for tax year 2015, you start collecting on January 1, 2015.  It is a wise idea to keep every receipt you receive on every purchase you make or every donation made. If a donation is greater than $500 you are usually required to have a letter of thanks from the party or parties that received the donation. The letter will state that you did not receive any service or reward for the donation.  Usually if you buy a chance on a car or money or anything of value, the gift is not considered a donation. Dues you pay to certain non-profit organizations are not considered deductible, but money donated to one or more of their Charites is.

At the present time most states and many cities also have income tax. You can check on your state status by going to your State Department of taxation and for the city in question to the city’s Department of taxation.

EXPENSES 

From the previous stated equation:  INCOME = EXPENSES + DEBT + SAVINGS.

In common usage, an expense or expenditures are an outflow of money to another person or group to pay for an item or servicer for a category of costs. It is almost impossible not to have expenses. Expenses are a part of life. One universal rule that can be used to keep expenses under control is to buy or obtain needs instead of wants. How often do we go shopping with a specific item in mind at a specific price and see an item we want at a higher price with more bells and whistles on it. This happens often with cars. Many of the modern cars have so many gadgets on them that we never learn what each device does. Depending what you are setting up an expense account for, the items used will differ and may be more complex.

An example would be if you are preparing a budget for a small business. In this blog I will discuss the expenses that you will need to use and understand to work with your finances.

The finances that you need to know and understand are three different expenses:

                1. Fixed

                2. Flexible

                3. Other

All 3 expenses are important, but I believe that the fixed expenses are the most important. Why I say this, is because if you do not pay them you may lose the item that you need to pay on a regular basis.  Let’s look at some examples of fixed expenses:

1.   Rent or mortgage

2.   Car payments

3.   School loans

4.   Utilities - if you have these on level billing.  This means that the total, which is an estimate of what you will pay for 12 months, is added together and 1/12 is paid each month. Any of your bills that can be placed on level billing will make handling your finances a little easier.

5.   Savings, which is one expense that people do not think enough about. A great deal of your further success in the financial world will depend upon your ability to save money.

Flexible expenses are those expenses that vary in amount from month to month. Some examples of flexible expenses:

                1. Food

                2. Gasoline

3     Charitable donations

4     Utilities not on level billing

  

The third and last type of expenses is other. This is sort of a catch all that does not fit in the first two: Items such as clothes, presents, comfort things such as magazines, candy, and most things that you buy once or twice a year. We will cover this in more detail when we cover budget and credit report.

Some of the reasons that expenses get out of hand:

1.   Divorce

2.   Putting wants ahead of needs

3.   Spending money from an upcoming raise that does not occur

4.   Lose of job and not adjusting to the circumstances

5.   Trying to keep up with the Jones’ life style.

6.   Drugs, alcohol, gambling

7.   Too much night life

 

 

Next time the discussion will be on DEBT

INCOME

Remember three sessions ago I introduced you to the equation:

INCOME = EXPENSES + DEBT + SAVINGS.

The next 3 or 4 sessions I will attempt to explain how these terms and equation may help you with your money matters. Again, I will only give you ideas and thoughts.  I stress again and again in this Blog - that I will give you the basics so that you are able to make decisions on your own.

When money is involved, it is very wise to receive input from several people you respect before spending large amounts of income on an item of which you have little or no knowledge.

Always keep in mind that you earned your income and you want to “get the best bang for the buck”.

On the surface you might ask why we are spending time on income. We receive income and we spend it. This is true, but I want to cover some types of income that may need to be handled in different ways than you would handle money received in a paycheck. There are basically three types of income:

1.   Earned Income

2.   Portfolio Income

3.   Passive Income

 

1. Earned income is any income that is generated by working. This includes money made from hourly employment. This also includes money earned from hourly work done for another person or from your own consulting.

Some common examples of earned income include:

a.    Working on a job

b.    Owning a small company

c.    Consulting

d.    Gambling (if you declare yourself a professional) and keep track of all your gains and losses.

When it becomes tax time, each one is treated differently, so it makes your tax reporting somewhat more complex.

2. Portfolio income is when you sell any item at a price higher than what you paid for the item. Often this is referred to as a capital gain or gains.

                              a. This can occur if you are selling stocks or bonds. These  

                                  are referred to as paper assets. Other types of paper              

                                  assets include; Certificate of deposits, Treasury Bonds, Saving Bonds.          

                               b. Buying and selling Real Estate. Portfolio income

                                   would occur if the property is sold at a profit.

                               c. Buying and selling of any other assets if a profit is                

                                    generated from the sale. A few examples of this

                                    are: coins, stamps and antiques that have increased in

                                    value.        

                              You may need some professional help if you are buying       

                                     or selling items listed in item 3 above.

 

3. Passive income is income you receive from something you have purchased or created. An example of this would be if you purchased a house and rented it out for more money than it cost you for the mortgage and other items related to upkeep of the property.

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Remember the equation I gave you above.

INCOME = EXPENSES + DEBT + SAVINGS.

 Always be on your toes to see how you spend or use your money. In the next couple of chapters I will talk about the 3 areas that your income needs to cover.

1.   Expenses

2.   Debt

3.   Savings

If I were to ask you what is the hardest to start and maintain, how would you answer?

All 3 are important and probably addressed in the goals that you are writing. For most people I have worked with, the savings is the hardest to start and to maintain. Most of the articles that I have read stress that people retiring have not put away enough to live securely in their retirement.  One article that was published this week stated that 1 out of 5 retirees will or have died in poverty. PLEASE do not let it happen to you.

BANKS and CREDIT UNIONS

The majority of people in the United States use either credit unions or banks for the majority of their financial needs. I will outline for you the 7 basic differences between them. There are other resources that people use for finances. The two groups of financial institutions are safe, and for the most part your funds are insured.

Let’s take a look at 9 main differences between the two:

1.   Credit unions are not-for-profit cooperation’s owned by their membership. Banks are for-profit, generally family owned or shareholder owned companies.

2.   Credit unions can and do generate earnings (profits).This money is returned to the membership in the form of lower loan rates, higher dividends, fewer fines and better service. Banks make the majority of their money on fee income. Because credit unions are member-owned cooperatives, they don’t have to generate profits to appease shareholders.

3.   Credit unions are run by volunteer boards, and Committees Members elect the Board of Directors, rather than hiring the Board. The Board of Directors represents the credit unions members in making decisions and upholding polices.

4.   Each credit union member has the opportunity to vote for the board members at the annual meeting. The banks have no process like this.

5.   Member vs. customer. At a credit union you are not just another account number. Each member has equal ownership, whether $5 or $5000. Unlike banks, credit unions have a somewhat limited field of membership. Some are broader than others. This field of membership has been expanding the past several years.

6.   Many people fear that their money in credit unions is not insured as well as money in banks. In both instances your money is insured to $250,000. The money in the bank is insured by an agency called Federal Deposit Insurance Corporation (FDIC) and your money in Credit Unions is insured by an agency called National Credit Union Administration.

7.   Credit unions do not try to compete with each other as do banks. This is one of the perks of being non-profit. Credit Unions work in tandem and form alliances, which benefit the membership. An example of this is that an ATM Card from one credit union can be used at any other participating credit union’s ATM without paying a fee.

8.   There is a rule in credit unions that you must have savings account to be a member. This rule is taken care of when you are required to deposit $5 in a savings account when you join.

9.   To finance a bank’s operations, they issue stocks and bonds.  Credit unions do not.  They only have money that is deposited by their members.

Stock is money (capital) raised by a business or corporation to start their operation. Once the stock is sold, it no longer belongs to the company, but to the individuals or organizations who bought it. For example, AT&T has over 10 billion shares outstanding; some are owned by other organizations. If you bought one share of AT&T (cost about $35), you would own about 1/10 billionth of the company. Do not be concerned if you do not fully understand this as we will come back to it at a later time.

A bond is where you loan money to a company or government for a defined period of time at fixed rate of interest. Bonds are used by municipalities, companies, states, USA and foreign governments to finance a variety of projects and activities.

The next issue will be on income.

 

SETTING GOALS

Rule of Thumb

Without a road map, you cannot reach your destination.

Every individual and family have different plans for the future. Think what you want for yourself and your family in the short term. What about the long term. If you are like most people, some of these wants will involve money. You will need money to buy a new car, pay for home improvements, send your child or children to college, and pay for additional education for yourself.

Many people feel that their life is out of control and to pay for the above items is a difficult thing to achieve. How would you like for your life to be different and achieve many of the things that you want out of life to become a reality?

A very useful tool to achieve needs is called goals.

The process of determining where you want to go in life and knowing how to achieve it is part of goal setting.

After you begin working on your goals you may find that they are no longer what you want, and so reset your goals to meet new needs and desires. 

 Setting goals is a powerful process for thinking through your ideal future and finding ways to your vision into reality. It will help you turn your dreams and desires for the future into something solid that you know how to achieve.

Setting and keeping goals is a very hard task. Many of the people that I have worked with over the past 20 years are very good about setting up the goals, but have a very hard time keeping them. If you remember, in an earlier part of my Blog, I said that everything in life is work and you must stay focused on what you are doing and don’t expect instant gratification.

Setting goals helps you:

·        Work toward making your future better;

·        Prioritize how you spend your money so that it goes toward things that really matter to you ; (always remember you earned the money and it is under your control, do not let anyone take money away from you unless you completely agree to allow this to happen);

·        Measure and track your progress toward getting the things you want out of life;

·        Take pride in bettering your life and the lives of your children,

You may set any time line that you want to achieve your goals:

·        Short term goals- usually 6-7 months in duration.

·        Medium term goals: usually 1.5 to 2 years in duration.

·        Long tern goals: may last for the rest of your life.

 

WHEN YOU SET UP YOUR GOALS, THE FOLLOWING WILL HELP YOU IN DESIGNING THEM:

1.   Specific—Who? What? Why?

2.   Measureable—how much? How will I know if it is done?

3.   Able to Reach—how will I do this? Is this a goal that I can actually reach?

4.   Important to me—is this something that I really want? Is now the right time to do this?

5.   Time — when do you want to reach this goal? In 3months, 6months ,

 a year, 5 years?

Now let’s put this all together. As we progress through the Blog, I will bring up subjects that will probably help with your goals. This is one of the hardest issues that you will come across in your personal finance, GOOD LUCK!!!!!

Next chapter in my Blog will discuss Banks and Credit Unions.

 INTRODUCTION TO THIS BLOG

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I retired 20 years ago from St. Elizabeth Medical Center in Dayton, Ohio. During my 34 years of employment I became very interested in the workings of money and finance.  

Shortly, after the start of my employment, I became President of the hospital’s credit union.  I then found out the credit union was in big trouble. They had $72,000 in assets and $70,000 in bad debt. I spent many hours in the evening working with the board members to get us on the right track.  I went to a number of classes to get the right information. During this time I was elected to be president of an officer’s credit union. Both of these were small so I was able to work closely with the members to help them with money issues. When the Hospital closed, all records were transferred to Universal 1 Credit Union.  At that time, our credit union had a net worth of $5,000,000.

I retired from the hospital in 1995, 2 years before the hospital sold to a group of investors. As soon as I retired I started to volunteer for St. Vincent DePaul. They were beginning a new program for homeless men. Many of these men had been addicted to drugs or alcohol or both. Also many had jail or prison records. Remember, I was an unpaid volunteer; but with the demands of the new program and the group of men we were working with, I spent 40-50 hours per week at St. Vincent DePaul. I taught Life skills, but as time went on, we determined that financial difficulties were the big problem. There were 3 courses that I found which addressed this problem. Two were taught locally and one was on line. I took all 3 of the courses. I found that techniques are very different when you teach people with a good financial back ground and a person who has little or no background at all.  A couple of years later the homeless clinic asked me to speak to a group of their clients every Friday.  I did this for 15 years, until lately when I became sick.  More recently I have worked with families at Catholic Social Services. Over all, I have met either on an individual basis or group with over 1200 persons. 

This now ends my personal information which demonstrates how my experiences lead me to do this blog on Finances - for those with little or no background in this area.

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In this Blog, when I use a financial term I will explain the term in as clear a manner as possible. I will attempt to cover a new subject each week. If all goes well, the new material will appear on Tuesday or Wednesday. At this time I would like to introduce an equation that I often refer to. As time goes on I will come back to it and we will discuss in length all of the equation’s parts:

   INCOME = EXPENCES + DEBT + SAVINGS.

 

NEXT WEEK THE SUBJECT WILL BE GOALS

INTRODUCTION TO THIS BLOG

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Up to the summer after I graduated from high school I was not very interested in attending college. We did not have the money, nor did I have a good background. My final grades in high school were 3 C’s and one B-.  I was working every night and weekends, so there was little time to study. My mother wanted me to attend West Point, because it was free and they had a stipend of $700 per year. I passed the mental exams, but failed the physical goals. During the summer of 1951, I received a letter from Heidelberg University in Tiffin Oh. They had one Scholarship available for 2 semesters which paid $150 a semester and also would give me a job on campus. Also I could drive back to Mansfield every 2 weeks and work at the hospital. It is hard to believe today that the tuition was $300 per year while today it is $20000 or more. My grades at Heidelberg the first year and half were the same as high school; all C’s. The 2<sup>nd</sup> semester my sophomore year I learned something that I use every time I talk to a group or an individual. This saying is:

WORK: No matter what you are doing in life, it takes work to accomplish the job. Also you need to be FOCUSED on the work and do not expect INSTANT GRADIFICATION.

It is good if you have a strong degree of motivation and use help and suggestions from the people you trust.

So what did the above do for me?  From the 2<sup>nd</sup> quarter of my sophomore year until I graduated, all my grades were A’s except one B. My Chemistry Professor at Heidelberg wrote to Purdue and they awarded me a full fellowship. I had all expenses paid and even had some left over for personal spending.

My first encounter with a financial investment was when I graduated from high school. I received about $500 In cash, so I went to a bank and took out a $500 Certificate of Deposit at 5% it gave me a big thrill that I would make $25 without doing any work. As you will see if you stay with my Blog, I am an ultra-conservative. Sixty years later, I still have that same CD, but I now only receive $4.00 per year.

What is a Certificate of Deposit?

A Certificate of Deposit is, in reality, a savings account with some strings attached to it. You are telling the bank how long you will keep your money there.  If you take your money out before the date that you and the financial institution (bank or credit union) agreed upon, you will need to pay a fine. On the positive side, your money in your account is insured up to $250,000. Usually you can invest your money for 3months to 10 year. The longer you invest the money, the greater will be the interest you will receive. You will need to make that decision.

Note: Every time I use a new financial term I will give a definition of the term, so in this manner you will learn the basic terms of finance.  The difference between a bank and a Credit Union will be discussed at a later time.