Common Cents # 50 Tax Time

 

Common Cents – Tax Day 

There are only three things that I know a lot about: the Bible, photography, and taxes. I also have opinions about music and cars. For the price of a cup of coffee, I will talk all day about music and cars. If you want to talk about the Bible, I will buy. But for taxes and photography, I like to get paid.

Since April 15 is Tax Day, and almost a national holiday, let’s talk tax for free. First, taxes are often due a different day than April 15 because of weekends, holidays, or just because the IRS needs more time. The due date this year is May 17, except for the estimated tax due date which remain April 15.  The drop-dead, jigs-up due date, as always, is October 15.

I have been a business owner since I was sixteen in 1964. I got serious about running a business to support my family in 1973. That means I have had forty-eight years of hands-on business experience. I decided early on that I would not let the tax code cloud otherwise good decisions. It is important to understand taxes but letting the IRS and tax laws dictate how our business operates is a bad idea.

The tax laws change frequently and almost always for political reasons. A tax-motivated decision this year may be a bad decision next year.

For example, owning a home is the most common way for middle-class Americans to build wealth. Buying a house when we can afford to do so is a great idea. Buying a house because we can deduct the mortgage interest and property tax to save money on taxes is a bad idea. I have had many tax clients who were excited about the big refund promised by a realtor because they bought a house this year, only to find that it made no real difference, usually because the standard deduction was greater than their mortgage and property tax deduction. The standard deduction and even the deductibility of interest change regularly. Making charitable donations are always a good use of resources but doing so just for the tax deduction is always a bad idea. Either we have a desire to give, or we don’t. A tax deduction might be a bonus, but it should not be a motivator. Having a baby to get another exemption or child tax credit is not good long-range planning.

That does not mean we can ignore tax implications of our decisions. A few years ago, I had a tax client who cashed in a large IRA to buy into a retirement community. An IRA distribution is taxed as ordinary income so she had less for this purchase after paying tax on the investment. She then sold her home of many years, much of which went to pay the taxes on the IRA distribution. The sale of the house was tax exempt. If she had waited to buy into the retirement community until she sold her home, or even taken a home equity loan until the house sold instead of cashing in the IRA, she would have saved tens of thousands of dollars in taxes.

Small timing adjustments can make a big difference too. For example, if we are nearing retirement, we must not take money from our IRA or pension account the same calendar year as our salary or retirement bonus. Waiting until the next year could put us in a lower bracket, especially in the amount of tax on Social Security. The taxable amount of Social Security is dependent on other income for that year. If our only income is Social Security, it is tax free. A big IRA or pension withdrawal will likely make 85% of Social Security taxable. This is huge for the average taxpayer. If we have a choice of December or January to take the money, wait until January.

Taxes don’t have to be burdensome or challenging, but they require a little thought and research to determine the best strategy each tax season. When in doubt, consult a tax professional for the best way to navigate these financial waters.

 

Common Cents # 49 - Priorites

 

Common Cents – Priorities

According to some recent estimates, about 1% of us have unlimited financial resources.   Sure, income and wealth inequality on many levels seem like big challenges. The rest of us, the other 99%, still need to set priorities for our resources, for spending and saving.

Assuming that we have a limited amount of money coming into our bank account, deciding how and where to spend the money are ongoing and important decisions. If we are married, this requires much conversation and understanding as well as compromise. Most conflicts in marriages center around priorities on handling financial resources.

The first priority should always be food and shelter, after that there are a lot of choices. Even in the basic categories of food and shelter the range of choices are huge. Do we want to spend a large amount of money on our home because that is where we spend most of our time and our surroundings are important to our self-image and general feeling of happiness? Or are we the person who finds it insane to tie up huge amounts of capital just for a place to hang our hat?

One of the most important decisions a married couple needs to make is how they prioritize spending. My wife and I decided very early in our marriage that travel was important. I think there was something in our marriage vows about Paris. I don’t remember for sure. I know that she had just returned from studying in France when we met and that was part of what she imagined our life could be together. We decided that travel was more important than a big house, designer clothes, or expensive appliances.  

We also decided that it was important to give to organizations that are able to bring hope to people and do work that we are not able to accomplish on our own.  Giving to people like this brings us a special kind of enduring joy and gratitude.

Once the basic needs are covered, the list of things we can spend our discretionary income on is endless. Do we raise horses, race automobiles, buy expensive musical instruments, or send our kids to private schools? It is extremely unlikely that an average person can do all of those things, or even more than one, if they are serious about the choices or hobbies.

Typical everyday questions around our house are things like “Do we make an improvement on our house or go on the two week vacation this year?” Cash in the IRA and do it all is seldom the best choice. “Do we buy a new refrigerator because the old one is out of style, or wait until the old one dies, which may be another 10 years?”

I know men who try to sneak a new shotgun or guitar in the house while his wife is out buying $300 shoes. This is never a good way to handle money. First, we need to concur on a general philosophy of what is important and keep the conversation open and transparent. For example, is dinner out in a nice restaurant more important than expensive shoes? Then we need a procedure for making decisions about the details. Setting a dollar limit that triggers a discussion is a good idea. Should any purchase more than $100 require a discussion with our spouse? Seems reasonable. Buying a book need not require a conversation, but a new television would.

I had a discussion this week with a friend about cars. Some people go for the least possible cost. To that person a car is just an appliance that gets them from point A to point B. For other people, an automobile is a source of pleasure and they can’t wait to get in the car and hit the road. Those two people are not going to buy the same car. My friend does not need to rationalize his Porsche to me. I get it. Another friend does not need to explain his old Toyota. I understand that too.

The point is, we need to set priorities on what is important. These are family decisions. Then we need to stick to those priorities and avoid impulse buying that we will later regret when our most important goals cannot be achieved.

 

 

Common Cents # 48- Cars

 

Cars

 

I will admit to being a “Car Guy.” I have owned 37 cars over my lifetime, so far. My TV is more or less stuck on the Motor Trend app, and I have a complete set of “Automobile Quarterlies.” I am a faithful follower of “Jay Leno’s Garage” on YouTube.

Since automobiles are often one of the largest purchases people make, it seems like an appropriate topic for “Common Cents.”

Unlike many car guys, I am not loyal to any particular brand, make, or even vehicle type. My Excel list of cars I’ve owned shows pickups, SUVs, station wagons, sporty cars, and big sedans. I just buy what I like or need at the time. My dad bought new pickups for his business every few years but second-hand sedans for the family car. I expect that this had a lot to do with being able to deduct depreciation, but also, he wanted the highest reliability for his work truck.

I have bought both new and used cars, and frankly from a financial position, I don’t see that much difference, assuming that we drive enough and keep the vehicles for more than a few years. I prefer to buy cars brand new because of the warranty, reliability, and for some reason, the sales experience is better. The reputation of “used car salesmen” is well earned from my experience. Buying a new car out of the showroom is always a fun experience. A used car – not so much.

I have found that within a reasonable price range, “You get what you pay for.” The exception is that beyond a certain price point, small improvements come at a big cost. For example, a $50,000 car is usually twice as good as a $25,000 car, but a $100,000 vehicle is probably not twice as good at a $50,000 car.

When shopping for a car, the first thing to determine is a budget. How much money do we have to spend? Unless there is an unusual finance option such as 0% deals, it is always best to save up money and pay cash. 0% financing or extremely low interest is a good deal and a strong incentive to buy new verses used. Good investments will go long way toward paying for a new car if we have zero percent financing and we are making 10% on our money. The catch and fine print are that it takes a high credit score to qualify for those low rates.

The next most important thing is to determine what our needs are. How much do I drive and where? A plug-in electric might be a great commuter car but would be totally useless if we ever drive 300 miles or more a day. My wife and I like to take long road trips. Five hundred-mile days are not unusual. That would be impossible in an EV. It can be easy to be caught up in fads, and it can lead to buying a car that is not totally what we need. My very first brand new vehicle was a Ford pickup which I needed for my business. I traded it for a Mustang when I no longer needed to haul stuff every day. The Mustang was fun, but we traded it for a large luxury sedan when we began to take long road trips.

There are hundreds of models of cars and trucks available because everybody has different needs. When buying a car, we need to imagine what our needs might be over the next few years. Is fuel economy important or would I rather spend a few more dollars for gas and arrive more rested or have more fun driving?

Most importantly, discuss big vehicle purchases with our spouse, significant other, and any other stakeholders. In most cases, an automobile is a family investment. We have to all agree on where the money goes to make the best decision for this expensive asset.

 

Common Cents # 47 - Invest & Save

 

Common Cents – Save and Invest

 

When I was a teenager, we had a family friend who had had some serious success in the music business. For several years in a row he was at the top of his field, bringing in the big bucks. Now he was back in our hometown, working at the local radio station.

One day he was at our house giving my brother and me our music lessons, when he happened to mention how stupid he had been to spend all that money. I remember he said that he could have bought a farm for the money he had made in just one year, but instead he had spent it all, and he didn’t even know where the money went.

That comment made a big impression on me. I realized the huge fallacy of assuming that if we are making money now, that it will continue. It should be obvious that if we have a hit record, get a pro-athlete contract, or even make a huge sale, that there is a good chance that we will be a “One-Hit-Wonder,” and that we need to invest the money because it may be our only shot.

Most people don’t think that way about their job or career. We assume that we will never go back to the measly salary we had last year, so we buy new cars, bigger houses, and all the other things we thought we wanted. Then we find that the company has been sold, or we lost the big account, or maybe we have health issues. In retrospect, we missed the chance to get money ahead, make good investments, or otherwise secure our future.

I have always been self-employed, so I assume that there is a chance that the last gig really was the last one. One day I will have been right. That means don’t presume on the future and make every dollar that goes through our hands count.

That also means saving and investing. Savings means to spend less than we make. Investing means to put the money some place where it will produce an income and grow on its own.

In deciding where to put the money we have many choices. The first thing is to invest in things we understand. If we are an expert on antiques and collectibles, that would be a good choice for part of our investments. If we love to fix up houses and don’t mind dealing with contractors and renters, investing in real estate can be a great strategy.

For those of us who don’t like midnight phone calls because a tenant’s furnace is out, or who get distraught because our classic car needs parts that are outrageously expensive, there are investments that don’t need daily maintenance, don’t eat, and don’t need any special care. Financial markets are by far the easiest place to put money that will grow, are easy to track, and are extremely liquid when we need to get cash out.  The stock market that includes mutual funds can satisfy the advice we receive to diversify our resources and can also allow us to assess our risk tolerance to invest accordingly.

With my “Rock-star” friends advice ringing in my ear, we started investing in mutual funds when I was twenty-five. Mutual funds are a collection of stocks and bonds managed by professional account managers. We should probably have started earlier, but that was when we felt that we had control of debt and also began the practice of giving first, then paying ourselves with our investment choices, and then living on the rest. I cannot image how our life would be different today if we had not had that long-term view of saving and investing.  My hometown friend provided the incentive to learn from his early mistake but it was up to us to act on the wisdom he provided.

 

 

Common Cents # 46 Generosity

 

Generosity

 

Watching someone open a gift that we have selected especially for them is a moment filled with anticipation, hope, and joy.  It illustrates the Bible verse that says “It is more blessed to give than to receive.” The truth of that verse could be because we know the recipient of the gift well enough to know exactly what they would enjoy owning.  It could be because we are grateful that we have the resources or skill to purchase or create the gift.  It could be that the recipient has already given us something that was meaningful to us and it is a way to reciprocate.  Generosity is the virtue that brings more pleasure to the person who possesses it than to the person who receives from it.

One compelling theme of the Bible is the encouragement for the reader to help the poor. Since the beginning of civilization, there have been rich people, poor people, and people in between. To a large extent our situation is determined by where and when we were born and who our parents were. Not just inherited wealth, but opportunities and handed down attitudes determine where we land on the wealth continuum. Jesus reminded us that we would always be among the poor and it is the responsibility of everybody else to help them in any way we can using the resources that we have.

We are also told that people involved with various ministries to others deserve a salary which should come from those of us working in business or in regular jobs.

About forty years ago my wife and I decided that we would give 10% of our income to our church and other organizations, especially those directly involved with lifting up people in need. We have chosen organizations that not only address the physical needs but also provide hope for the spiritual lives of people. It is a decision we have never regretted and has contributed a great deal to who and where we are today.

We also support government efforts to help the poor. The recent Federal relief bill should go a long way toward helping those most in need. The rest of us have an opportunity to decide how to best use our stimulus check. I know people who plan to sign their $1400 check over to organizations involved in helping people who need it most.

One of our big joys each year is planning our giving budget. To whom and how much should we give the money we have designated in our “Giving” budget? We spend a lot of time praying for wisdom and researching the work that is being done to decide where and to whom we send to gift. Of course, the biggest beneficiary is always us – the joy that come from being generous, knowing that our limited resources are being used by a limitless God.

” For if you give, you will get! Your gift will return to you in full and overflowing measure, pressed down, shaken together to make room for more, and running over. Whatever measure you use to give—large or small—will be used to measure what is given back to you.” Luke 6:38 TLB

 

 

 

Common Cents # 45 - Life's A Gamble

 Life’s a Gamble

Life is a gamble. We pay our money and take our chances, or as my Dad used to say, “speculate and accumulate.” The Bible says in James 4, “Now listen, you who say, 'Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.' Why, you do not even know what will happen tomorrow. What is your life?”

If we talk to a financial counselor or investment advisor, they will try to determine our “risk tolerance.” How distressed will we be if our investments lose money? That is a similar question to how much money do we want to make. We need to know the upside and the downside of every purchase and investment to determine if we are comfortable with the risk involved or if it causes us to lose sleep.

We can buy insurance to protect against unforeseen losses such as a house fire or a serious health crisis, but the amount of insurance we end up buying is largely a factor of our risk tolerance. Can I afford to pay for a root canal if that is recommended, or do I need to enroll in dental insurance even if my dental health has been excellent?

This principle applies to many areas of our lives and to organizations big and small. A merchant gambles on how much merchandise to buy or what will be in style next spring. It is really impossible to know. We are trusting our experience, but it is still a gamble.

We saw this on a large scale recently in the State of Texas. Some years ago, the state government deregulated the utility companies which allowed them to set their own rules and maximize their profits. Then the utility companies bet against cold weather in deciding not to winterize the energy equipment and supply. Certain types of equipment and upgrades that would be routine in cold climates were ignored because sub-freezing temperatures seldom occurred in much of Texas. The result was millions of people were without power, heat, and clean water for days. It was a gamble that was lost because pipelines hadn’t previously been freezing. The same weather conditions had different results in Minnesota, Wisconsin and Canada where sub-zero temps are expected and planned for. The risk there is obvious.

We never know with certainty what the weather will be, what our health will be, or what our job or work situation will be like in the near or distant future. We should plan and hope for the best, but prepare for the worst. Expect that spring will arrive on time, but have the furnace serviced for the cold weather to come. Expect that our kids will earn college scholarships to help defray the cost but save for college expenses anyway. Make wise investments using the best counsel available but keep some cash on hand to be used for an immediate need.

We can’t guard against every possible occurrence, but we can make wise choices, insure for the worst case scenarios, and enjoy life without fear as a result.

Common Cents # 44 - Contentment

 

Contentment

 

I have been in several conversations this week about contentment. Each year for the past several years I have chosen a “Word for the Year.” One year it was “Learn,” one was “Write,” in 2020 it was “Vision.” My word for 2021 is “Content.” It was an easy choice because that is very much where I am at this year.

A few years ago I felt what can best be called a “Wave of Contentment” sweep over me. It had to do with the realization that I had already done most of what I had hoped I would do in my life. I had no desire to start a new business or a new band. There was no requirement to write another book if I didn’t want to, nor did I need to ride a bicycle across Kansas or run a 10K again. I was under no severe financial pressure and in short, I was content to enjoy life and whatever it might bring.

That contentment came in handy in 2020 when very little went as planned. Because of being content I have been able to roll with the punches and take the days as they came.

I have found that being content is one of the big factors in experiencing happiness. The Apostle Paul in the book of Philippians talks about being content in his financial circumstances. ”I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want.” Philippians 4:12. 

In other words, contentment is not a station in life, but an attitude. This newsletter is about money and that is the context that Paul was talking about. This kind of contentment is being satisfied with what we have, not striving for even a little bit more.

That does not mean it is acceptable to be lazy and spend the rest of our lives on the sofa. Contentment just frees us up to pursue things that matter the most to us. Some of these things might bring financial reward or they might not. Often contentment brings financial rewards if it is accompanied by creativity, or new ideas or goals. Virtually every successful business idea I have had came to me while on vacation, or relaxing somewhere, feeling free and content.

But in another sense, contentment is the result of achieving our goals. If we have not defined what our goals are, we won’t know when we have accomplished them. Contentment comes with the feeling of a job well done, knowing that we have done what we were supposed to do using every tool we had with the best effort we could give.

The opposite of contentment is disappointment, dissatisfaction, displeasure, worry, trouble, misery, or agitation. None of these are good things. Other words for contentment are satisfied or having peace of mind.

Often contentment comes down to our attitude toward money. If we think that we would be content if had just a little bit more, guess what. . . .We won’t be. We can develop the mindset to be content, or we can choose a life of strife and dissatisfaction. It is our choice.