medical expenses, household expenses and a fund for vacations.
Add all of this up. Hopefully you have more income than expenses and you have left what is known as discretionary dollars, money you can spend on something not planned or budgeted.
Do You Have Problems
After you have completed your Net Worth and Budget Planners, (using one of the online sources I mentioned or a spreadsheet or even just a few sheets of paper, print out a copy and look for areas you may want to change. If necessary, review everything with a trusted friend, family member or financial planner. Perhaps your net worth planner will show that your liabilities are growing faster than your assets, or that you need to place more dollars in savings and investments that provide for growth.
CUTTING COSTS
There are many ways to reduce costs without dramatically changing your lifestyle. Here are a few cost-savings methods that you will want to consider as you plan for your financial freedom.
Refinancing your mortgage to get a lower rate
Cutting utilities costs through more efficient use
Comparison shopping for things you need
Saving up for major purchases and paying cash rather than using a credit card
Buying in bulk or at wholesale whenever possible
Buying cheaper term life insurance, and/or getting your life, auto, and home insurance from the same source for the multiple discounts
Cutting health cost by practicing preventive medicine, eating properly and getting exercise.
The Value of an Annual Review
The two planners you have completed help you determine if your spending, savings and investments match your financial goals. At this point you may not be sure whether you are on the right track or not. You have a few choices:
Do nothing
Learn more about personal financial planning
Seek professional help
If you decide to seek professional help, you can look to your tax advisor, accountant, banker, insurance agent, a stockbroker or financial planner. Just remember that not all of these people are experts at financial planning or may only be well trained in one thing (like taxes). Even financial planners come in two types: fee-based, or fees plus commissions. You may want to consider working with someone whose primary business is to provide planning services, rather than selling you financial products. If they have to earn a commission, they may be inclined to offer you products that yield them the highest commission.
Finally, it is a good idea to keep score of your financial growth at least once a year in order to help you adapt to changes in your financial circumstances and to congratulate yourself on the progress you are making in reaching your goals.
Your Income Taxes
A tax is a charge imposed by the government to raise money for public purposes. Citizens should expect to pay their fair share for the services they receive from the government. The good news is the government does not expect you pay more than your fair share (whatever that is). What is your fair share? That can be the subject of debate and our tax system has seen many changes over the years to allow for various deductions and credits to help you get at what your fair share of taxes should be. It is up to you to use all of those deductions and credits to reduce your taxes to the lowest “fair” share possible.
The Basics of Tax Planning
Our federal income tax system is progressive in nature, which means the more you earn the more Uncle Sam expects as his share. It is not the purpose of this book or this chapter to debated the merits or fairness of the various tax codes, but I do find this quote interesting: “If you tax people who work, and you pay people who don’t work, don’t be surprised if you find a lot of people not working. I have never heard of a poor person spending himself or herself to prosperity. It doesn’t work.” - Economist Arthur Laffer.
Suffice it to say the tax code is extremely complex, so much so that there is an army of tax preparers available every tax-filing season available to assist you.
The percentage rate at which you are taxed is referred to as your “tax bracket”. This percentage rate can change each year, if Congress passes new tax laws.
You may be aware of the tax cuts enacted in 2001 and 2003 (commonly called the “Bush Tax Cuts”) have been extended into 2012, but Congress may act on a new tax code, so you should keep up with the changes, or retain a qualified professional to help you.
The 10%, 15%, 25%, 28%, 33% and 35% tax brackets that we’ve seen may be replaced with a simple fair tax rate, but don’t count on it. Congress seems to like making the tax code complex. At least it keeps the tax accountants and lawyers employed.
Tax planning requires finding out where you stand now with regard to your tax liability and how that will change as a result of your financial transactions. Then you need a plan of action to reduce, eliminate or postpone that tax liability. Knowing the effects of taxable events beforehand enables you to make better decisions regarding timing of purchases or sales as well as whether or to defer income or accelerate deductions in any given year.
Determine You Tax Liability
Fortunately determining your tax liability is not that difficult for most of us. A simple formula would be to answer the question, “How much did you make? Fine sent it in.” But seriously, a 100% tax rate would never work. So you have to determine not only how much did you earn, but what can lawfully be taken as a deduction from income before you figure out how much you will pay in taxes.
Here is a simple formula:
1 Gross Taxable Income, minus
2 Adjustments to Your gross, equals
3 Adjusted Gross Income, minus
4 Itemized Deductions (or standard deduction) and minus
5 Exemptions, equals
6 Taxable Income, minus any
7 Tax credits, minus
8 Taxes paid, equals
9 Taxes due (or refund owed).
Now the devil is in the details.
Gross Taxable Income - This includes all taxable income: salary, wages, tips, dividends, taxable pensions, farm income, interest income, partnership income, taxable social security and all other taxable income.
Adjustments - Subtract adjustments from your gross income to arrive at Adjusted Gross Income or AGI. Adjustable items can change from time to time, based on what Congress wants to allow you to include. They include things like: IRA contributions (with limits), Keogh contributions, self-employed medical insurance premiums and alimony paid.
Itemized Deductions - Special rules govern these deductions and sometimes you may only qualify for the standard deduction. Currently itemized deductions include: medical expenses, taxes paid (State & Local), mortgage interest, charitable contributions, casualty loses, employee business expense and moving expenses. Some of these deductions are subject to income limits, so you might need to study these carefully to see what you can take as deductions and which ones don’t work in your situation.
If you do not itemize, use the standard deductions. A higher standard deduction is allowed for those over 65 and the blind.
Exemptions and Credits - In order to arrive at your actual taxable income, you also get the personal exemptions as a deduction, before you determine taxable income. Now most of might think we are finished, just calculate the taxes owed on your