Does the IRS think you have a Business?

2013 Tax

Many taxpayers started a business and thought, or were told, “Don’t worry about the expense, it’s a write off on your tax return”.

The truth is that this may or may not be true.

Tax is not a cookie-cutter industry and as you can probably guess, the IRS did not make a “One Size Fits All” tax rule for write-offs.

If your intent is to enjoy your hobby and perhaps make some incidental income, this blog may not be of interest to you.

If your intent is to make money through a legitimate business, as defined by the IRS – this is for you

  • My purpose is to provide you “heads up” and “eyes open” to help ensure your business and financial success
  • This blog is provided to help educate you on how to organize, manage and conduct your business to improve your chances with the IRS in the event that your “activity” is audited ***

 

IRS Hobby VS Business Rules:

  • An “Activity” is either a hobby or a business
  • The IRS uses facts to decide if an activity is a (hobby) or a business
  • Neither the Code nor the Regulations provide an absolute definition
  • It is difficult for a taxpayer to win a hobby-loss case at the Tax Court level
  • If your tax return pays tax as a business and the IRS finds that it is a hobby, your tax return can be corrected and your tax liability could go up; i.e. you might owe the IRS money ***
  • The financial adjustment may be significant. In addition to the loss of the deductions, you, may face a §6662 understatement penalty for the tax years in question ***

 

Hobby Rules:

  • An activity is presumed to be a Hobby if a profit is not earned in at least 3 taxable years of a consecutive 5-year period
  • A taxpayer can overcome the presumption if he/she can show the activity was operated with a For-Profit motive
  • Under IRC §183, a taxpayer’s deduction for Hobby losses is limited to the income produced
  • You must itemize deductions to claim hobby expenses on your tax return
  • Hobby expenses, along with other miscellaneous expenses you itemize on Schedule A, must come to more than 2% of your adjusted gross income before you can deduct them
  • Hobby Expenses can bring your Hobby Gross Income, to zero
  • Income is reported on your IRS Form 1040, Line 21, Other Income
  • I understand that this can be confusing, so I will rephrase differently, to help bring clarity:
  • Hobby Income needs to be reported
  • Hobby Expense deductions have 3 limitations:
  1. Total Itemized Deductions have to be greater than your Standard Deduction
  2. Hobby expense deductions are limited to the hobby income produced, and then
  3. Then those expenses must be reduced by 2% of your Adjusted Gross Income (AGI)

 

Business Rules:

  • A Business has a For-Profit motive
  • A simple, general rule is that if the business makes a profit in 3 of 5 years there will be a presumption of profit
  • IRC § 183(d) is a safe harbor for the taxpayer
  • If the business is For-Profit, no limit on deductions is imposed and the taxpayer may be able to use losses to offset (reduce) other taxable income
  • If an activity has not produced profits in three of the past five years, the taxpayer may still argue that the business has a profit motive by relying on Reg. §1.183-2, which provides for a nine-factor test
  • More weight is given by the courts to the objective facts (rather than to the taxpayer’s statement intent) Dreicer v. Comr., 78 T.C. 642 (1982)
  • Judicial decisions suggest that no one factor is controlling
  • Court decisions often seem to consistently rely on the first factor as the most important

 

The prevailing regulations list nine critical factors for determining whether an activity constitutes a Hobby or a Business. They are:

  1. The manner in which the taxpayer carries on the activity
  2. The expertise of the taxpayer or his or her advisers
  3. The time and effort expended by the taxpayer in carrying on the activity
  4. The expectation that assets used in the activity may appreciate in value
  5. The success of the taxpayer in carrying on other similar or dissimilar activities
  6. The taxpayer’s history of income or losses with respect to the activity
  7. The amount of occasional profits, if any, which are earned by the taxpayer
  8. The financial status of the taxpayer
  9. Any elements of personal pleasure or recreation

 

Business Tax Reporting:

  • A Sole Proprietor or Qualified Joint Venture will file a federal return on Form 1040 and Schedule C- Profit or Loss from Business
  • If you have another Schedule C business activity; a separate Schedule C is required for each business; the same is true for your business records
  • Check to see what tax reporting is required by your state tax board and local municipality
  • The IRS expects you to pay tax as the money is earned
  • If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
  • Quarterly estimated tax payments should be paid if you expect to owe more than $1,000 in federal taxes on an annual basis
  • Use 1040ES for Individual Estimated Payments
  • Reconcile payments on your annual Year End tax return
  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400

 

Building the Foundation for a For-Profit Business Intent

Tips for Success:

  • Conduct your business, like a business, consistently
  • Consistency includes Quarterly tax reporting and payments – as required
  • Quarterly reporting requires that your accounting records be current – so you know if you have a profit or a loss
  • Taxpayers bear the burden of proving that they engaged in the activity with an actual and honest objective of realizing a profit
  • Keep detailed financial records
  • Credit Card and Bank statements and cancelled checks are not enough- the IRS needs to see the detail of what you bought
  • Receipts are your Audit Protection – the IRS has Strict Substantiation Requirements
  • The Cohen Rule,” states that you can use “other credible evidence,” or rely on IRS Publication 463 which states that you don’t need to keep receipts for expenses under $75 – it is safer to save all receipts and to follow a consistent business practice
  • Don’t use Cash: it is hard to track, easy to spend and nearly impossible to reconcile with receipts
  • Establish separate checking and credit accounts for your business – don’t co-mingle business & personal funds
  • Keep a Time/Activity Log- Outlook or Google calendar may be requested during an audit
  • If you have had business losses and made changes in the attempt to improve profitability, keep a list of changes made and the date the change was made
  • Establish a level of expertise by attending seminars, networking, and joining professional organizations related to the activity
  • Anticipate that you could be audited ***
  • Pursue your passion, enjoy the journey, and ask questions as you learn along the way

 

If you want to learn more about IRS tax rules, contact for me for a $75.00 Special: includes a 45 minute Q&A phone session plus a free “cheat sheet” for your personal use. The “cheat sheet” includes accounting/tax tips about what is a deductible expense, etc. Offer is valid until 9/5/16.

 

“Success is nothing more than a few simple disciplines practiced every day” – Jim Rohn

“To open a shop is easy; to keep it open is an art” –Chinese Proverb

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

5 Ways a CPA can help Small Business

 

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Small Business Owners, particularly in the early stages, are doing it all.

Sometimes it can feel like an up hill battle. There is so much to do, and learn, and not enough time to do it. Financial resources can be scarce and stretched thin.

Sometimes spending a little can help you a lot. The value is apparent.

What We Do:

CPA’s do much more than crunch numbers and report on facts that have already happened in your financial statements.

CPA’s provide advice. We educate our clients and help them improve their financial business results.

Our value can often be quantified, measured, seen and/or felt by business owners.

CPA’s provide a wide variety of services.

I enjoy helping small business owners with income tax and with all the detail that includes. I understand almost no one likes tax; however, we all like to save money. For me, using IRS rules to help others is fun.

How We Help:

1.  A CPA  can help prevent “Blind Spots”:

What you don’t know can hurt you. I’m not telling you this to scare you. Rather, to educate you and provide an objective example.

Many new Small Business Owners do not know that the IRS expects them to pay tax as the money is earned and that quarterly reporting and payments are required if you expect to owe more than $1,000 annual tax to the IRS.

This means that you need to keep your accounting records current so you can determine if you need to begin quarterly reporting and payments. 

2.  A CPA can help with your Budget:

  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400
  • The 2015 SE tax rate on Net Earnings is 15.3: (12.4% social security tax and 2.9% Medicare tax)
  • Do you include this expense in your budget so you have cash when it is time to pay the IRS?

 

3.  A CPA can help you make Decisions:

  • Data (information) can be used to help you make cost effective decisions
  • Review Forecasted to Actual Financial results – what happened?
  • Help a business owner interpret the financial statements and offer suggestions to improve profitability, cash flow, and efficiency

 

4.  A CPA can help you Minimize your Income Tax:

  • Do you know what you can legally deduct on your tax return?
  • Do you know how to use strategy to reduce your business tax bill?
  • Tax Planning includes education, evaluation, and action

 

5.  CPA can help you improve Profitability:

  • When I told an architect that they were required to pay Self-Employment tax, they were shocked. They told me, I have to raise my prices immediately. I am not making any money.
  • We can help you determine if your pricing is profitable or if you are working for free or for not as much money as you thought you were making
  • You don’t want to wait until year-end to find out
  • As we all know, time is money and the faster we can earn it and build a financial cushion, the more comfortable we feel

 

You have 3 choices:

  1. Do it yourself – inexpensive, but can be costly
  2. Do it for me – expensive & might be seen as a luxury until the cash starts coming in – consistently
  3. Do Some of it for me: a cost effective bridge to obtain education and help on a “as needed” basis

 

Thanks for reading,

Deb

Call me about an Accounting & Tax Tip Cheatsheet  619-549-2717

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

 

Dive into the Numbers-Who Does What?

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Bookkeepers, Accountants, & CPA’s: Who Does What?

 In my experience, I have found that frequently, many people do not understand the difference between a Bookkeeper, an Accountant, and a Certified Public Accountant.

A business owner may wonder, “ Do I need a bookkeeper or an accountant?”

The answer might be both.

The following general descriptions may provide some insight as to function and how each group may work together to provide value to those they serve.

Bookkeepers: May have Certifications

  • Uses accounting software to record day-to-day financial transactions
  • Generates financial reports
  • Sends invoices to customers
  • Enters invoices received from suppliers into the accounting system
  • Reconciles Bank Statements
  • Prepares Payroll
  • Specific responsibilities will vary by type and size of business
  • Work may be overseen by an accountant and/or the small business owner

Accountants: Bachelors Degree, with an emphasis in Accounting 

  • Assist Business Owners with their accounting systems, financial statements, income tax returns, tax planning, and investment decisions
  • Prepares detailed budgets
  • Works with a corporation’s management in analyzing costs of operations, products, and special projects such as forecasted to actual results
  • Works with management in setting prices of products manufactured or services offered
  • May prepare Cash Flow projections and analysis
  • Works with banks to ensure the company will have funds when required
  • Leads Tax Planning and determines income tax and other taxes payable to governmental entities
  • Assess financial risks associated with projects
  • Accountants and auditors perform overviews of the financial operations of a business in order to help it run efficiently.
  • May Supervise teams of Bookkeepers in a large office or work in conjunction with bookkeepers to provide a different level of service to owners
  • Help a business owner interpret the financial statements and offer suggestions to improve profitability, cash flow, and efficiency

 

Certified Public Accountants (CPA’s)- Licensed by the State and agrees to abide by a Code of Ethics

  • Have met the “Three E’s” – Education, Examination, and Experience – that are required for initial licensure as a CPA and they continue to meet the annual continuing education requirements to renew their license each year
  • The current exam includes 4 parts and includes a testing period of up to 14 hours
  • A minimum of 40 continuing education hours are required each year
  • CPA’s frequently become Trusted Business &/or Personal Financial Advisors
  • We may perform any of the services shown under Accountants, or work in Public Accounting which includes a wide range of accounting, auditing, tax, and consulting tasks for small business, corporations, non-profit organizations, government, and for individuals (Personal Financial Planning)
  • A CPA can do two things than an accountant without a CPA license cannot:
  1. Provide Attestation Services: Compilations, Reviews & Audits of an entity’s financial statements
  2. Represent clients in front of the Internal Revenue Service
  • Certified Public Accountants, Enrolled Agents, and Attorneys have Unlimited Representation Rights before the IRS. Tax professionals with these credentials may represent their clients on any matters including audits, payment/collection issues, and appeals

 

Accounting and Tax is like a foreign language for most people.

It is an acquired skill.

Experience can be wide and deep.

Yet, most of us “Number Crunchers” have one thing in common, we enjoy helping and we use our knowledge and experience to empower others.

We like to use our gifts to help you.

 

“The most important thing in communication is hearing what isn’t said” – Dr. Peter F. Drucker

Similarly, an accountant/CPA may find meaning for you by “reading between the lines” and offer suggestions to improve the Bottom Line on your financial statements.

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Tips for Independent Contactors & Sole Proprietors

 

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Tax Planning & What Money is Really Yours to Spend?

“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin

Death will only come once, while taxes linger with us year after year.

Many of us spend 2,000+ hours a year working to earn money. Doesn’t it make sense to spend a few hours to learn how to manage it, particularly, when it comes to tax, which is our most expensive lifetime expense?

This blog is offered as a tool to help Independent Contractors & Sole Proprietors avoid tax “surprises” and pro-actively plan their cash flow.

Why Read? Cash Flow – You need to know: What money is really yours to spend?

Many taxpayers were surprised earlier this year when they filed their 2015 tax returns. Why? They were not prepared for the tax affect of having earned what the IRS calls “non-employee compensation”.   For example, the 15.3% Self-Employment Tax was an unexpected hit to their cash flow.

Who should read? : (Independent Contractors including Direct Sellers, Freelancers, Airbnb Hosts, Uber & Lyft Drivers, Internet Sellers)

Sole Proprietor: Flying Solo

  • Taxpayer is the owner; the business is not separate
  • Unlimited exposure to liability
  • All debts or claims against the business can be filed against the owners’ personal property
  • If the owner is sued, insurance is the only form of protection
  • The business itself is not taxed separately; The IRS calls this “pass-through” taxation, because the business Profit and Loss passes through the business to be taxed on your personal tax return
  • Tax is based on your personal income level and is taxed at graduated rates
  • File your personal income tax on Federal Form 1040 and all business information on Schedule C, Profit or Loss from the business
  • Self-Employment tax is required if your annual net-earnings is more than $400
  • Net Earnings is determined by tracking both the revenue earned and the corresponding acceptable business expense

What to Do:

Self-Employment requires both basic accounting and additional tax reporting

Accounting:

Maintain a Basic Profit & Loss Statement to determine Net Earnings per Quarter

  • A Profit & Loss statement is needed to determine if you owe income tax and self employment tax
  • If expenses are less than income, the difference is Net Profit
  • If expenses are more than income, the difference is Net Loss
  • Losses may be limited on your tax return
  • Expense definition may differ for “books” and “tax”
  • Tax requires that certain expenses “be capitalized” and expensed over a period of time

Income includes:

IRS Form 1099-Miscellaneous (1099-M)- Income

The Gig Economy is also known as the 1099 Economy because Independent Contractors should receive this form from anyone that has paid them $600 or more during a tax year. The form is sent to both to you and to the IRS. This means, that yes, you need to report the income – even if you did not receive your 1099-M form or if you were paid less than $600 from a single source.

IRS Form 1099-K- shows Income you received through payment processing platforms

  • PayPal and other merchants that process payments for your business will issue this form to you & yes, the IRS
  • The form is issued in settlement of third-party payment network transactions above the minimum reporting thresholds of $20K in transactions and 200 transactions
  • The income reported is the Gross amount of all reportable transactions
  • The Gross amount does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts
  • The dollar amount of each transaction is determined on the date of the transaction
  • The 1099K only shows income paid to you; it does not include charge backs to your account or fees you paid
  • You are responsible for tracking your “income” – you certainly don’t want to pay tax on more than you actually received

Be aware that possible “double reporting” could occur – Reconcile to avoid  “overlap”:

  • Your clients could issue you a 1099-M and send a copy to the IRS
  • PayPal or another vendor could, theoretically, include this same income when they send you a 1099-K
  • Although it is not required, it is a good idea to at least review, if not reconcile, what is being reported as “income to you”
  • Consider creating a spreadsheet to Cross –Reference payments, for a 1099-M and 1099-K comparison

Business Expense:

1099 Income can be reduced by the related “ordinary and necessary” expense

  • Receipts and mileage logs must be maintained to support the deduction expense you claim on your tax forms
  • Mileage logs should include beginning and ending mileage, where you went, who you saw, and why you went (business purpose)
  • Receipts fade. Add notes in ink and then scan to preserve
  • Ordinary expense = Common or accepted in your trade or business
  • Necessary expense= Helpful or appropriate for your trade or business
  • The IRS code provides for allowable deductible expenses and the IRS can take the deductions away if records are not maintained

When: Tax Tips for Filing Requirements:

Federal, State, & Local Tax may need to be paid each Quarter

  • The IRS expects you to pay tax as the money is earned. If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
  • Quarterly estimated tax payments should be paid if you expect to owe more than $1,000 in federal taxes
  • Use 1040ES- Individual Estimated Payments
  • Reconcile payments on your annual Year End tax return
  • File your federal return on Form 1040 and Schedule C- Profit or Loss from Business (Sole Proprietor)
  • Check to see what tax reporting is required by your state tax board and local municipality

Schedule C:

  • If you drive for Uber and also sell items on ETSY, a separate Schedule C is required for each source of business income.

Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400

  • Sole Proprietors & Independent Contractors must pay both the employer and the employee side of Social Security and Medicare taxes; this is called Self-Employment tax
  • The 2015 SE tax rate on Net Earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).
  • The Self-Employment tax rate is 15.3% of the first $118,500 of income and 2.9% of everything above that amount
  • If you also work as an employee, be careful that you do not overpay your Social Security tax. The $118,500 applies to your combined wages, tips, and net earnings
  • Self-Employment taxes are reported on Federal Form Schedule SE
  • Sole Proprietors can deduct ½ of this cost on 1040-Line 27, the deductible part of self-employment tax

Tips for Financial Success:

  • Don’t Co-Mingle Personal & Business Money – keep separate accounts
  • Maintaining separate accounts helps to show your business intent of making a profit
  • Use tax planning for better cash flow management
  • Profitability is the goal for most small business and one great tool to get there is to use the tax laws that are designed to help your success

Action Steps:

  • Fine tune your DIY process and use the above information as a guide – schedule time to review financials and calendar dates for payments
  • If you want some help or prefer a “Do it for Me” process, contact me for an introductory special

Your Success matters to me.

My intent is to use my blog to educate and empower others by teaching tax rules to save you money.        Thanks for reading!

You either master money, or on some level, money Masters you” – Scot Alan Turner

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health. Her mission is to be an affordable & accessible resource to help answer money questions for individuals and small business. She can help by being your compass while you captain your ship. 

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com 

 

 

10 Quotes to “Invest in Your Success”

In honor of ‘Small Business Week 2016”, I offer you 10 quotes to help you ‘Invest in your Success’, the theme for this years celebration.

Dreams, put into action, are the initial seeds we sow before we might become an Entrepreneur or Small Business Owner

  • “We all have dreams. But in order to make dreams come into reality, it takes an awful lot of determination, dedication, self-discipline, and effort”- Jesse Owens

Education

  • The road to success is always under construction” – Paul Harvey

Experience

  • “In theory, there is no difference between theory and practice. In practice, there is” – Yogi Berra

Self-Development Growth

  • It may be hard for an egg to turn into a bird: it would be a jolly sight harder for it to learn to fly while remaining an egg.”  – C. S. Lewis

Process – Think, Plan, Execute, Monitor, Measure – Repeat

  • “Change does not roll in on the wheels of inevitability, but comes through continuous struggle. “ – Martin Luther King, Jr.

Investments – Time & Money

  • “Price is what you pay; value is what you get” – Warren Buffet

Measure – Return on Investment (ROI)

  • “The most dangerous kind of waste is the waste we do not recognize” – Shigeo Shingo

Business Efficiencies

  • “I cannot say whether things will get better if we change; what I can say is they must change if they are to get better.”  – Georg C. Lichtenberg

Improvement – Mentor- an easier way to learn and increase efficiencies – Avoid learning the “hard way”

  • That’s the result of Leadership. To make sure that which shouldn’t happen, doesn’t happen” – Tony Blair 

Success- is not a seamless journey. Probably boring if it was. We learn as we grow.

  • I don’t want to get to the end of my life and find that I lived just the length of it. I want to have lived the width of it as well.” Diane Ackerman 

The10 most powerful 2 letter words; If It Is To Be, It Is Up To Me

Thanks for reading!

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health. Her mission is to be an affordable & accessible resource to help answer money questions for individuals and small business. She can help by being your compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com 

 

 

SBW2015: Showing Gratitude for all Small Business Owners

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America is celebrating National Small Business Week all over the country & special events will be held May 4 – May 8, 2015 in cities across the United States & via the web. It is a time that we as consumers can show our appreciation for local business by shopping locally & promoting them by sharing their information with others.

As a small business owner myself, I also thought it would be fun to share a few financial tips that may be helpful to other small business owners. It is another small way to say thank you & show support to my community.

Take Time to Work On Your Business & Not Just In It:
• Financial Statements & Tax Returns both tell a financial story & can be used as a road map or a compass to help guide profitability
• On at least a quarterly basis, Compare your Budgeted/Forecasted Amounts to Actual Results to identity differences (variance)
• Try to determine why there was a difference, if any, & adjust as necessary
• Also compare Year to Year Actual Results – where is your value being created & lost?

Watch The Bottom Line by Protecting your Assets & Managing your Risk:
• On 10/1/15, the financial responsibility (liability) starts to shift for fraudulent transactions to U.S. merchants if they have not upgraded their payment systems to accept EMV Chip Payment Cards. This is true if the card issuing company has added the chip to their card & you have not upgraded your POS system. Rules vary by issuing card companies & products sold. More information can be found from http://www.darkreading.com at : http://t.co/1OqiwTLY0P
• Know your Net Worth & make a conscious decision about how much of it you want to protect by buying insurance & how much you want to “self-insure”

Try Not to Leave Money on the Table:
• Avoid financial pitfalls, fines, & penalties by knowing & applying FLSA laws correctly including classifying Exempt, Non-Exempt, & Independent Contractors & treat them & pay them correctly
• Use the tax laws to strategically plan your business operations to minimize tax expense & keep more money “in your pocket”

Deborah Ann Fox, CPA helps individuals & small business owners build & protect their financial wealth. She is available for in-person, or remote appointments. See http://www.debfoxfinancial.com for more information.

Money Spent, Wisdom Gained, & 20 Helpful Tips

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Many of us have said, “I wish I had known then what I do now; I would have done things differently”.

This is particularly true when it comes to money & our financial situations. Money trouble or challenges occur for a variety of reasons:

We spend when we shouldn’t or we spend without understanding the true cost:

As a student, perhaps we used some of our student loan to go shopping. Maybe, we bought things we knew we couldn’t afford because we wanted or deserved it, or signed contracts without reading or fully understanding them.

We spend because we lose our job & spent our financial safety net to survive

Sometimes we end up in money trouble just because of unexpected life events. This has happened a lot since 2008 when people suddenly found themselves with a “pink slip” & not able to get another well paying job. Even if you had the now outdated 3-6 months livings expense safety cushion, it wasn’t enough. Debt piled up.

We spend because we don’t have any other choice; it is a revolving circle:

When debt piles up, we may play the “rob Peter to pay Paul” tactic & move debt from one card to another.

We pay the bills for the services that are the most important to us – housing, electric, phone, gas, & food and hope we can pay the rest of the bills -soon. We hope something will change and actively seek solutions.

We spend to pay high service fees: Fringe Banking, Unbanked, & Under -banked:

The movie “Spent: Looking for Change”, is about hardworking Americans who do not have access to traditional banking services. The film tells us that there are nearly 70 million Americans that are unbanked & financially underserved. They use check cashers, pawns shops, payday lenders, & money order services. These alternative financial services are expensive & those that least can afford it spend more than traditional bank users to cash their payroll checks & to pay their bills.

We spend because we want our tax refund now:

Low to moderate income tax payers pay extremely high interest rates & fees to get some or part of their tax refund now rather than wait a couple of weeks and avoid these needless high expense charges.

The National Consumer Law Center’s website provides the following description:

  • Refund anticipation checks (RACs) – RACs are a financial product used to deliver refunds and to pay for tax preparation fees by deducting them from the consumer’s tax refund.
  •  RALs from non-bank lenders – A few payday and other non-bank lenders are offering RALs. These loans could be more expensive and riskier than bank RALs.

Since the 2008 recession, many people have permanently changed the way they spend their money.

Following are 20 tips to help you make your money go further. This, then will provide you the opportunity to either pay down debt, build a safety cushion, or invest in your future.

Money Management & Spending Tips:

  1. Some “assets” appreciate and can go up in value; spending money here makes sense
  1. Other “assets” depreciate as soon as you buy them – cars, furniture; consider buying used or refurbished
  1. Accountants use a term called “Sunk Costs” which means a cost that has already been incurred & cannot be recovered; limit your sunk costs
  1. Opportunity Costs: the value of something that must be given up to achieve something else; limit how much you spend on a things that you want; you might need the money later for a need
  1. Good debt provides you an opportunity to get ahead; there can be a return on your investment; i.e. a mortgage on a home
  1. Bad debt includes high interest rates on unpaid credit card balances
  1. Borrowing on credit is expensive; debt makes you a slave to payments; you’re a hostage with limited life choices & flexibility
  1. Building & Maintaining a good credit score means it will cost you less to borrow money
  1. Forgo bad debt & instead, build toward your dreams
  1. When you want to spend instead of save, think about your long-term goals. Is going out to eat, buying coffee at Starbucks, going shopping because you feel depressed or want something new worth adding more debt or forgoing savings?
  1. Read your contracts & plan for both the best & the worse scenario- can you afford both?
  1. Know that managing money is becoming more simple and that there are is a lot of free help
  1. Use the internet to learn more about personal finance- Coursera offers free classes
  1. Use on line tools to help you determine your best money moves; I have several on my website, on the resources page
  1. Hire someone to help you understand & determine your best possible alternatives
  1. Avoid “problem pile-ups”- it is too hard to solve almost anything that way. Choose one thing to work on, resolve, choose another
  1. Don’t beat yourself up if you made what you consider a “money mistake”. Ideally, we all learn as we grow. This is a normal part of life & it is fully possible to recover & regroup
  1. Don’t assume you know the answer, because you think “it is true” or someone told you. Look for the answer yourself or try to get your answers in writing from an objective source
  1. If you are a parent, be careful that you are not unintentionally teaching your children poor money habits by saying things like, “I am not answering the phone, it is another bill collector”
  1. Sometimes we learned poor money habits as a kid and carried them with us in to adulthood without realizing it. This has become so common that there is a new field of study & help: Behavioral Finance. Learn about this is if it applies to you

Deborah Fox, CPA is working to make financial information affordable & accessible. She helps others improve or protect their personal or business financial health by answering specific money questions. She provides information while building knowledge & practical skill levels for her clients. She is available for local or remote appointments. Thanks for reading.

Website: www.debfoxfinancial.com

e-mail: debfoxfinancial@gmail.com

Phone: 619-549-2717