Common Cents # 22 - Work Smarter, Not Harder

 

 

“A little sleep, a little slumber, a little folding of the hands to rest, and poverty will come upon you like a robber, and want like an armed man.” Proverbs 6: 10-11. Part of the American myth is that if laziness leads to poverty, then surely, hard work will lead to wealth. Part of the argument against slavery before the Civil War was that a free man would work harder for his own benefit than a slave would under compulsion. The labor union movement came about as more and more people realized that hard work alone did not bring prosperity, especially to the workers.

I mentioned to my friend Eric, that I was taking a class called, “The Master Guide to Financial Reporting and Analysis using Microsoft Excel,” and that I really didn’t know why. I didn’t need it for my business, and I wasn’t looking for a new job. He mentioned the class to his wife who reminded us that we cannot know too much, every skill enhances our lives. Every new skill or bit of knowledge improves our lives, sometimes financially, but always in every other way.

I am reminded of the story about Steve Jobs taking a college class in calligraphy. It was a totally random elective, but he was so enthused about fonts and letter design that when the Macintosh operating system was being developed, he insisted on a wide variety of fonts and customizable type. Because of that one class, our use of computers and design is completely different than it might otherwise have been.

Most new businesses, innovations, and successes come from the combining of seemingly unrelated fields. It is this combining of skills and knowledge that lead to success, not working harder.

Our quality of life is determined by the skills we have, the variety of things we can do, and the knowledge of many different fields, not by how many hours we work or the number of widgets we can get on the truck. As the songwriter Hoyt Axton sang, “Work your fingers to the bone, what do you get? Boney Fingers, Boney Fingers.” Clearly, working smarter not harder gives a better outcome.

The income gap between people with college education and those with only High School or less is widening quickly. This is almost certainly because of skills, not work ethic. The greatest thing we can take away from formal education is the desire to learn new things and the desire to develop new skills.

The writer of Proverbs, Solomon, goes on to say in Ecclesiastes 10:10, “If the axe is dull and its edge unsharpened, more strength is needed, but skill will bring success.” In other words, take time to sharpen your axe.

Jim Mathis

Common Cents # 21 - Entertainment

 

Getting the Most from our Entertainment Dollars

 

My idea of entertainment always involves live music, delicious food, and educational travel.  The last few months have been full of dizzying changes of plans, cancelled reservations, and miraculous refunds.  For me, entertainment is a basic need for a full life. I don’t know where it falls in the hierarchy along with food and shelter, but I am pretty sure it is right up there once those basics are covered. Evidence of music, athletic contests, and various types of recreation go back to the earliest recorded history.

It is interesting that humans have such a variety of ways to entertain themselves. Some people enjoy sports, some enjoy music, while others would rather watch a movie. The current pandemic has thrown a curve at just about every form of entertainment. It has been weird to watch the Indy 500 and the Kentucky Derby on television with no fans in the stands.

We have been amazed that so many of the cancelled festivals chose to provide some kind of broadcast or streaming free of charge from previous years of these events. We have been able to see a number of wonderful concerts as well as touring world-renowned museums from the comfort of our living room. We have discovered a few more festivals to add to our bucket list when they actually occur again.

This brought up the idea of cost-benefit analysis. Of course, watching a show on a screen in our living room is not the same as being there, no more than watching a football game on television is like being at the stadium. But in some ways, there are advantages. It is a lot less hassle, we can see and hear better, and the food is likely better, not to mention cheaper.

So, how do we decide how to spend our entertainment budget? You do have an entertainment budget, don’t you? What percentage of our income should we spend on entertainment? Entertainment includes things like going out to eat, cable TV, Netflix and Sirius XM subscriptions, vacations, and concert and sports tickets. We probably spend more than we think if we add it all up. Maybe we should use this “off year” to take a look at what we spend and see if it adds up to the enjoyment we get. Some of us are anxious to get back to seeing the world, while others realize how much they enjoy staying home and saving the cash.

One year we had season tickets to the Kansas City Royals and it was a lot of fun. When they raised the prices the next year, we chose to use those dollars for a season of plays with the Theatre League. We all have different priorities and should spend time in family discussions talking about the best way to spend our entertainment dollars. I like to think in terms of smiles per hour per dollar. A hundred dollars will buy a very nice meal at a beautiful restaurant but would barely pay for parking at Arrowhead Stadium. For some people this would not even be a discussion, others will need to talk about it.

We don’t want to deprive ourselves of much needed recreation and entertainment, but unless we have unlimited funds, we need to use the money wisely to get the most bang for the buck for the activity that gives us the most pleasure. 

Common Cents # 20 - The Balance Sheet

 

CC # 20 – Balance Sheet

 

Taking a trip these days is made far easier by using GPS and Google Maps to point the way. The big advantage of these over a paper map is that the GPS will tell us where we are right now. Knowing exactly where we are is the key to figuring out how to get to our destination.

In our financial lives, the point we are now is called a Balance Sheet or a Net Worth Statement. The idea is pretty simple. We list the value of what we have and subtract what we owe to get a number which basically tells us where we are now on the financial road to our eventual goal.

We start by listing our assets, what we have. The normal way is to first list current assets or cash. This would be our bank accounts, savings accounts, and even money in our pockets if we love detail. Then we list the long-term assets. This includes the value of our house, cars, furniture, any retirement accounts, and personal items such as jewelry or collections. Add these all up to determine our total assets.

The second part of the balance sheet is liabilities, what we owe. Current liabilities are bills that are due soon, balance on our credit cards and things like that. Long-term liabilities are home loan mortgages, auto loans, student loans, or anything else that we will eventually have to pay.

Subtracting the total of all liabilities from our total assets gives us our “Net Worth.” Think of net worth as what we would have left if we sold everything and paid all of our bills. The amount that would be left is called net worth. Hopefully it is a positive number. It is certainly possible to have negative net worth.

The Balance Sheet is literally a dated snapshot of our current location. Because the numbers are always changing, the Balance Sheet only shows a moment in time. To be the most helpful, we need to update the numbers on a regular basis to see trends, where we are making progress, and where progress has stalled. An annual balance sheet is good, but quarterly or even monthly could be very valuable, especially if we’re just beginning to determine what course of action to take in an area of life. If we use Excel to prepare our balance sheet, the rows would be assets and liabilities and we can use columns for various dates so we can easily see progress in areas like growing retirement accounts, increasing equity in our home and so forth.

An accurate Balance Sheet also helps in setting goals and helps us determine how much money is enough, or perhaps even, how much is too much. We need to ask ourselves if a high net worth may indicate a lack of generosity, insecurity, or missed opportunities.

We can enjoy the journey toward reaching financial goals when we can identify clear progress along the way, comparing where we were, where we are, with our destination in view.

Common Cents # 19 - Coupons and Gift Cards

 

 Coupons and Gift Cards

 

Many companies we do business with provide incentives, loyalty programs, or gift cards that keep us continuing to be a regular customer.  I recently cashed in some Southwest Airline Points for a Panera Bread Gift Card which I loaded onto my Panera App on my phone. This should cover all of my Panera meals and drinks for a few months, especially since by using the phone app, I get bonus items, and save a huge amount of time at the order counter. The Southwest Airline points didn’t come from flying, but from charging my everyday business expenses to my SW Visa Card.

Whenever we eat out, we often use gift cards that we received as rewards from using various credit cards. We only use credit cards that give us points or cash back toward gift cards that we will use for other things. We charge everything we can, including some “every month subscriptions” such as the phone bill, take the 1.5% or more cash back or accumulate points, and always pay the card bill before the due date to avoid any interest, service charges, or late fees. Since we never have a credit card balance, we aren’t concerned about the interest rates they charge, but instead, look closely at the rewards for using the card. Many are quite generous.

When we shop at CVS, we usually have a small stack of coupons and “Bonus Bucks” from the last visit. When the cashier rings up the sale, not only do we have a smaller balance due, we often get enough coupons or money back awards to pay for the next visit. I don’t know if they like us because we are loyal customers or dislike us because we take advantage of the deals. These types of “loyalty” programs are popular because they encourage repeat business.

I almost always have a $5 reward card from Ace Hardware whenever I stop there for the usual household necessities.

Most coffeehouses, bagel shops, and delis have some sort of program that gives a free drink or a meal after nine visits or something similar. It may seem like a hassle to try to keep track of all of those coupons, loyalty cards, and gift cards, but a small amount of attention and discipline can save hundreds of dollars a year. If we are not taking advantage of these kind of things from businesses we would normally use anyway, we are leaving money on the table. Also, if you believe you qualify, remember to always ask for a senior discount. Some places consider anyone over fifty to be a senior. It is great to have something good accompanying the years that have been lived!

The point is to always watch for loyalty programs and awards. Over the course of year or two, they can be worth quite a bit of money toward the things we would normally buy anyway. And remember that it could mean a great deal to friends or family to have one of these gift cards tucked into a greeting card for a special occasion or because you know they could use some encouragement during these unusual days.

 

Common Cents # 18 Too Much Stuff

 Too Much Stuff

Can money buy happiness? It depends. Lack of money can bring unhappiness, but so can too much money. Surveys show that the money to happiness curve is bell shaped. The happiest people are found in the middle section of the curve with the most unhappy and stressed people being the richest and the poorest. Assuming most of us are in that middle group, money can buy a level of happiness, but if it doesn’t, it is because we have spent it buying the wrong things.

The poor are not happy because their basic needs of even food and shelter are uncertain or not in reach at all. The richest people are not happy because they have too many belongings and riches that weigh them down with responsibility, maintenance, insurance cost, and a need to maintain their elevated status. We start out being consumers until soon we become the consumed, devoured by our own stuff.

I have found that it is far easier to buy stuff than it is to get rid of it. I am determined to be very careful with what I buy, knowing that it is likely to occupy a place in my life, my house, or my mind for a long time.

If we want to spend money on things that will increase our happiness, we need to spend it on things that will count, like deeper and more interesting experiences with family and friends, not just more stuff.

There is a saying in photography, “If you want your photographs to be more interesting, first, stand in front of something more interesting.” The old photo-journalist maxim is, “F8 and be there.” In other words, exposure isn’t going to make any difference if you are not on the scene. The greatest camera in the world is useless in a drawer. When I see a beautiful ten-year-old car for sale with low mileage, my first thought is, “What a waste.” Cars are made to be driven, to see new things, and drive down long highways and country roads on adventures with our favorite people.

This principle applies to many areas of life. Experiences and actually being present are more important than what sort of camera I have, or what kind of guitar I play, or what kind of car I drive.

I was at a woodworking seminar a few years ago and one of the students listed all of the wood working equipment he owned. He asked what he should buy next. The instructor thought for about a half second and said, “wood.” Everybody laughed but the point was made. We probably have everything we need to do whatever we want to do. We just need to do it. One more lens, effects pedal, drill bit, or a bigger computer isn’t going to make us more productive or enrich our lives nearly as much as living each day, enjoying what we already own to its fullest potential.

Money only buys happiness if we spend it on the right things. Things like travel, an evening out with friends, or a meaningful book will bring us a lot more happiness than more belongings that weigh down our lives.

 

Common Cents # 17 - Employee vs Contractor

 

Employee verses Contractor.

Have you ever wondered about the difference of being an employee versus an independent contractor for a company?  Because of recent Uber news from California, there has been discussion about this issue. With more and more individuals looking for ways to gain extra income, it needs to be understood to get the best result from the time and effort expended.  The Internal Revenue Service sets out a clear description of each, but some details can make it confusing.

If I am an employer with employees, I am required to pay into their Social Security and Medicare account, withhold their part of Social Security, Medicare, and income tax to submit to the government for them, and am likely to provide health insurance and maybe a pension plan. Additionally, there are requirements concerning overtime, minimum wage, dismissals, record keeping and so forth.

If I contract with someone to do a particular job, I do not have to do any of those things. For example, if I hire somebody to mow my lawn, they are not an employee, they are a contractor. I just pay them when the lawn is mowed. They are responsible for reporting their income, paying their own taxes, providing for their own health care and everything else. They can come and go as they please, work as much as they like, furnish their own mower, buy the gas, and pay for repairs as needed.

If on the other hand, I own the mower, buy the gas, and tell them to be here at 9:00 and pay them by the hour, they are an employee. Obviously, there could be some gray areas, with some employers declaring employees to be independent contractors to avoid paying taxes and employment laws such as minimum wage or overtime.

When I was a tax professional this was a big issue. There would be people coming in to file their taxes, saying they were employees of a certain company and then produce a 1099-Misc, not a W-2. The 1099-Misc is the form for non-employee compensation. That means that they had no withholding, so their total tax bill was now due. Additionally, they had not paid any FICA (Social Security and Medicare) which was now due. If I receive a 1099-Misc, the IRS assumes, at least for the company issuing the 1099-Misc, I am self-employed and I must file a Schedule C and do all of the associated record keeping for the income received. For 2020 there is a new Form 1099 especially for contractors.

Every year, I had to explain to many people that their “employer” may have just ripped them off and in fact, may have committed a serious crime by illegally declaring an employee to be an independent contractor without giving them the freedom associated with being an independent contractor.

If I have people working for me, I must know the difference and be willing to follow the law. Contractors do not need to punch a time clock or have direct supervision. They just need to do the work in the agreed amount of time. If I furnish the equipment and supplies and tell them what hours to work or supervise the work, they are employees and everyone is subject to a different set of laws.

This has been in the courts recently because Uber and Lyft say their drivers are independent contractors because they furnish their own cars and do not have to answer every call. The government says they are employees because of rules concerning what kind of cars they can use, a required dress code, and other supervisory issues dictated by Uber and Lyft. The rulings that will be given by the court will be of interest to thousands of people in the “gig” economy doing all they can to provide for themselves and their families.   

Common Cents # 16 Qualified Charitable Distributions

Common Cents - QCD

This week’s information is about an opportunity to give to Charitable Organizations utilizing a special tax situation called the Qualified Charitable Distribution from an Individual Retirement Account.  This opportunity is of benefit to those age 70 ½ and older, and even if we are not yet that age, is something we should know about to share with those who are.

Generosity is a wonderful virtue. Uncle Sam even encourages our generosity by allowing us to deduct certain gifts from our income to reduce our taxes. The stipulation is that the organization we give to has to be approved and meet certain strict qualifications. These are called 501(c)3 corporations.

The way it works is that an organization incorporates in the usual way with the state and then applies to the IRS for not-for-profit status. They have to demonstrate that the purpose is not to make a profit, but to operate for the benefit of the community. The exempt organization cannot participate in political activity in any way. There are no shareholders or owners and a 501(c)3 corporation is considered to be owned by everyone. Some examples of 501(c)3 organizations are churches and other religious organizations, private schools, arts organizations, museums, and some health care organizations.

To deduct our contributions, we may need some documentation, depending upon the amount of the gift and whether it is cash or property and we must itemize our deductions using Schedule A on our income tax return.

Since the Standard Deduction has gone up in recent years, fewer people itemize their deductions, meaning that fewer people experience a tax benefit by their contributions.  There is a little-known provision in the tax code which allows some very cool tax benefits if the taxpayer qualifies.

If a person is over age 70 ½, they can make a contribution directly from an Individual Retirement Account (IRA) to the eligible organization without any income tax having to be paid on the contribution. The retirement fund trustee or financial institution who manages the IRA sends a check or electronic transfer directly to the charity of choice. Doing this withdraws money from the IRA and gives it to the church or whoever is chosen, except that by giving directly from the IRA it does not count as income to the IRA account owner. Since the funds are not touched by the owner, it is not reported as income on the tax return. That means that the Standard Deduction can be taken, the contribution doesn’t increase the taxable amount of Social Security, and even more importantly, does not affect state or federal income taxes at all.

This arrangement is called a Qualified Charitable Distribution (QCD) and counts toward the Required Minimum Distribution (RMD). While the RMD was set aside this year as part of the Covid-19 financial relief provisions, it is likely to resume at some point in the future.  It also became possible as part of the Covid-19 changes for people over 70 ½ to continue contributing to their IRA if they are still earning income.  So, one could reduce the amount of taxable income by the amount put into the IRA and also not pay tax on the funds given away using the Qualified Charitable Contribution.

It’s always good to know that generosity can be rewarded by getting the most from each dollar given, even tax-free in cases like these.