Money Mommy

Stuff your mom should have taught you, but didn't…


Month: March 2016

Personal Budgets A Top Down Approach

We’ve all heard it.  You need a budget! What’s your budget? Did you budget for that?

Ugh.  How to get started.

Budgets are simply  a framework for  handling your money. They are as fluid, detailed and structured as you want them to be. At the very least, you should know whether you have enough money for your expenditures.

Your first budget is a first pass. Just a guess. Know that it will change over time and that’s OK! That really is what it is about.

Marie bought her first house on a whim.  Tired of renting, she went  house hunting, found a little place that the realtor said she could afford, and made an offer.  Imagine her delight when it was accepted!  She moved her studio apartment into a 3-bedroom bungalow and that’s when reality set in.  Mortgage, insurance, taxes, repairs, new fridge and stove, furniture, car loans.  She called me in a panic when she received her first property tax bill.  “Mom, they made a mistake!  I paid all the taxes when I bought the house!  They just sent me another bill!?”  Somehow, her dad and I neglected to tell her that property taxes come due every year.  We all got a chuckle out of her naivety. Luckily, she still had enough in her checking account, but it was clear she would need a budget to handle her funds.

Although I am a bookkeeper by trade, I do not want to track every penny.  Neither does my daughter.  And especially neither does my husband! We opted for a Top Down Approach for her budget.  We divided  her expenses into tiers: fixed, necessary, discretionary, savings and emergency.

In the fixed tier we placed her mortgage, car and property insurance and property taxes.  We totaled these expenses for the year, and then divided that number by 26  since she received a pay check every other week.  (If you receive a monthly pay check divide by 12; if you receive a weekly pay check divide by 52.) This amount was put in a separate checking account every pay period.  Every month, her mortgage was paid from this account.  And every year, when property taxes and insurance come due, there will be enough in this account to cover them also.  Marie also added her installment payments to this account – $40 for her fridge; $30 for her student loans – and increased her biweekly deposits to cover those expenses.  She then set up automatic payments, so she would never be late, and she was building excellent credit.

Next we turned our attention to the necessary expenses – utilities, food, gas, phone bill, etc.  A portion of her check was placed in a second account to cover these costs.  Since these payments would fluctuate, she would need to monitor this account a little more closely. She could control these costs to some extent and she could adjust the amount of her paycheck that was allocated to this second account.  There are oodles of sites for conserving electricity – another word for sayings – and making succulent cheap meals to save.

Finally we have the discretionary tier.  Anything you don’t need to live as a functioning adult, but would like to have. New clothes, morning coffee shop, movies, sports events, gifts, eating out, vacations, apps for your phone, the list is endless.  Once you have the fixed tier and the necessary tier properly funded, the remainder of your pay check can go here. This tier can be further sub-divided to fit your personality. Do you need/want a category for gift giving, charitable donations, the hair dresser etc.  You may decide that some of these items are not discretionary, but necessary. Allocate your paycheck accordingly.

Notice that I did not include a tier for savings and emergency funds.  That is because these are the over-arching tiers that you must have, and yet are the first things that are omitted to balance a budget. As we created her tiers, we allocated a healthy 15% to savings and apportioned funds to create a six month emergency fund,  Unfortunately, this meant there would not be enough to cover even the second tier of necessary expenses.  It became necessary to decrease the percentage of savings and slow down the accumulation of emergency funds.  These will be increased over time as pay raises happen and fixed debt (ie car loans) are paid off.

So there you have it.  A Top Down Approach.  Emergency funds and saving first.  Then determine what your fixed expenditures are and allocate appropriate funds there.  Next, place funds in a second account to pay all necessary living expenses.  A final account will hold your totally discretionary funds. Any of these accounts can be subdivided if you want to save for something specific. IF necessary, you can tinker with the Emergency and Savings tier to meet fixed and necessary  expenses.  But DO NOT give up your future security for current short term enjoyment. You can always move your discretionary funds into fixed or necessary accounts.  But NEVER pull money out of your fixed account to pay discretionary items.  This is a sure sign that you are living beyond your means.

Remember, you are in charge!

Start your 401K – Today!

For much of the 1900’s, pensions, social security and personal savings provided the retirement income for most working Americans.  This worked reasonably well for a time.

But there were limitations.

Since the 1970’s there has been concern that Social Security would run out of money.  In an effort to keep Social Security viable, there have been multiple tinkerings with the formula including increasing the social security tax rate, taxing higher wages and increasing the retirement age for full social security benefits.

Companies have struggled to pay their pension obligations through the years.  Many large and small companies have not been able to maintain the pensions that were due to their retired employees.  Several defaulted on pension payments or simply went out of business.  In an effort to protect the pensioners,  ERISA (Employee Retirement Income Security Act) was established to provide a portion of the lost retirement wages.

Traditionally a man or woman would start in a company fresh out of school and work there until they retired 25-30 years later with a company pension.  Now, however, we are a mobile society and most workers will not stay at a job the requisite 25 or more years necessary to receive a pension.  Fewer and fewer individuals can count on a pension.

Clearly, we Americans must save for our own retirement.

Among the arsenal of savings vehicles available to us  is the 401K.

The 401K became popular in the 1980’s as companies sought to divest themselves of pricey pensions.  Workers can now elect to put a portion of our salary into a 401K.  Rather than receive this pay, the money would be invested in a limited choice of investment vehicles.  Unlike other savings, money placed in a 401K account will not be taxed when it is earned.  Rather the full amount will be allowed to grow tax deferred until it is taken out in retirement.  In the 401K, we are investing money that would otherwise have been spent on taxes, in effect, money that is borrowed from future tax obligations. And, since most people expect to be in a lower tax bracket when we retire, we will greatly save on taxes when we actually withdraw the money.

Once we elect to place money in a 401K, it is done automatically for us.  Before we even receive our paycheck, a portion of our pay is being invested in our own retirement plan.  Financial advisors will tell you to pay yourselves first.  With the 401K, that is exactly what we are doing.

Start with 1% or 2% of your pay.  That is just $1.00 to $2.00 for every $100.00 you receive.  Pennies really.  Realize that this bit of money is being saved for you and belongs to you.  Each year as you get a hoped for pay increase, increase your 401K by one half of your raise.  Let your money grow!

I remember years ago when my husband first signed up for his 401K.  The amount that he put in wouldn’t even buy groceries for a week for our family of six.  I wasn’t sure if this would ever be enough, but he continued his course.  It was about seven years later that I looked at his 401K again.  He was still investing the same modest amount each month.  But, the monthly increase in our investments due to market growth was nearly twice as much as our current contribution.  Through the magic of compounding our investments were making huge gains.

Of course, we were riding the roller coaster of the stock market.  Some months were better than others.  Some years were better than others.  But for the long haul, you are reaping the benefits of steady investing.  Hey, when the market is down, you are actually getting your stocks and mutual funds at a sale price.  You wouldn’t run to the store when they advertise that prices are up.  Why wait to buy stocks until they are up?

So start your 401K today.  It is a great way to reap the long term benefits of investing.






On Deductions and Taxes

People are so full of good advice – Especially when it comes to your taxes.

Do you want a new car?  “The sales tax on your new car is deductible.”

Feeling philanthropic? “Your donation is tax deductible.”

Need new doors or windows? “You can get a nice energy credit.”

Feeling bad about all those loosing lottery ticket? “My neighbor deducted all of his losing tickets.”

Student loans? “Big deal. The interest is tax deductible”

And so it goes with medical bills, mileage, home mortgages…so many things can reduce your taxes! You should spend! spend! spend!

It all sounds great.  Until you do your taxes, and you find that not much has changed.  So what happened to that awesome refund you were promised.

Lots of things.

Let’s look at the actual reason for doing your taxes every year.  Our United States tax is a “pay-as-you-go” system.  We are expected to pay our taxes on income as we earn it.  This is why our employer withholds taxes every pay day.  Individuals who are self-employed are expected to make estimated payments every quarter as well.  Then, by April of the following year, we look at all our income and determine how much we should have actually paid.  Did we pay too much? – We get a refund.  Did we pay too little? – We owe taxes.

Now, to complicate matters, the United States government offers incentives to encourage their citizens to act “responsibly.”  The government also reduces taxes to provide much needed relief in specific circumstances.

But let’s go back to that stack of deductions.

If you haven’t paid any taxes to the IRS, you won’t get a refund.  By the very definition of the word, refund, you are getting back what you have already paid in.  So, if you haven’t paid in any taxes you won’t get any money back.  Refund is money that you already paid in.

My sister-in-law plans to retire next year.  Due to the nuances of the tax system, she will not owe any taxes next year. She will not be required to file.  She will she not get a refund. In fact, she won’t have paid any taxes at all.  “But what about all my medical bills? Can’t I deduct them?,” she asked me.  The answer is yes and no.  Yes, you can keep track of all your deductions, fill out a tax form and send it off to the IRS.  But, no, you won’t get any refund since you never paid any taxes in the first place. In fact, your income is below the filing threshold so the IRS doesn’t even require that you fill out a tax return.  So what is the point of filing?

(Just to be clear, there are a few certain times that you can get money back that you hadn’t actually paid in, generally when there are children involved.  These are credits.  Some of them are refundable. We will discuss that in another post.  -MoneyMommy)

Perhaps you did have a job and you did pay taxes. Good for you! Currently, nearly every American citizen can reduce their gross income by over $10,000.00 to get to their taxable income.  If your taxable income is decreased to zero or below, you should not owe any taxes.  In fact you should get a full refund of your federal taxes that were withheld throughout the year.  More deductions will not cause you to get a bigger refund when you are already getting everything back.

The standard deduction is a gift to the American populace. Nearly every taxpayer can take the standard deduction, currently $6,200 for a single person, off their taxable income.   If all your deductions do not exceed the standard deduction, it is pointless to itemize your deductions. For instance, my neighbor has paid off his home.  His property taxes are just $525 and he donates $300 to his favorite charities, for total deductions of $825.  He can reduce his taxable income by $825 or he can use the delightful standard deduction and reduce his taxable income by $6,200. It’s a no-brainer.  He’ll reduce his income by the full $6,200, and save at least $620 on his taxes, if he’s in the ten percent tax bracket. AND he did not have to spend any of the $6,200 in the first place. Married couples can take double that amount ($12,400!) off their taxable income.  So, if your deductions are not even close to the standard deduction, all those papers that state “may be tax deductible” will not affect your refund at all.

But, beware! higher earners may run afoul of the dreaded AMT tax.  The AMT is a parallel tax system established in 1969.  The AMT tax is designed to ensure that everyone pays their fair share of taxes by eliminating many deductions. I’ll save that topic for another day.

To recap, deductions can certainly increase your refund by reducing your taxable income.  But it is certainly not a one-size-fits-all.  You need to examine your own circumstances to see what course of action is best for you.  When in doubt, talk to a tax professional.  And don’t rely on hearsay from your neighbor down the street.  Chances are, he’s about to be audited for deducting all those losing lottery tickets.


“What do you mean, I gotta pay taxes!!?” I’m a contractor!

Congratulations!  You are finally done with school and have entered the work place.


And your nice boss has hired you on as a contract worker!

He says you won’t have any taxes taken out of your paycheck.

And you get to take lots and lots of deductions.

Things couldn’t be better…Until you sit down to do your taxes in early April….That’s when reality hits.

You can’t deduct a home office when you actually work somewhere else.  You can’t deduct your gas and mileage and tolls when you drive to work – that’s called commuting.  In fact, your nice boss provides you with your tools, office supplies, work station. Everything.  You actually don’t have any deductions at all.

It’s about this moment in the tax preparation process that people start moaning that they don’t pay for more work items out of their own pocket.  Don’t fall into this trap!  Remember, everytime you haven’t had to pay for anything, you kept more money in your own pocket.

But I digress.  Anyone who is a contract worker must save for the April 15th reckoning with the tax man.  The contract worker pays his own federal tax, social security tax, medicare tax, state tax, and any additional tax imposed by his locality.  These are all the taxes that an employer would generally have withheld from his employee’s paycheck.  In addition, the contract worker will also pay the employer’s share of the social security tax and medicare tax.

So, as a rule of thumb, the contract worker should save a minimum of 35% of every pay check they receive:

  • 10% – 25% Federal Tax
  • 6.2% Social Security
  • 1.45% Medicare Tax
  • 5% – 7% State and Local Taxes
  • 6.2% Employer portion of Social Security Tax
  • 1.45% Employer portion of Medicare Tax
  • 30.3% – 47.3% Total taxes to save

Well, looking at the above taxes, perhaps the higher earning contract worker should aim to save closer to 50% of their check.

Both my daughter and daughter-in-law were hired as contract workers before they were actually permanently hired as employees at their respective firms.  I can still hear my daughter wailing, “You mean I have to pay taxes on all that money!?”  Well, sure.  So does the rest of the country.

Open a seperate account in your bank, and label it your tax account.  Put 35% – 50% of every paycheck you receive into it.  Without fail.  If you doubt this amount, recheck my numbers above, or find a friend or family member who is working and will let you look at their paystub; take a look at the taxes that are withheld.  You will see that taxes have reduced their check by nearly one quarter to one third.  And don’t forget you will need to double the social security tax and the medicare tax, since your nice boss is not paying for that.  You will need to save at least one third of your earnings.

Mark down how much is in your tax account on December 31.  Now figure out your taxes.  Do you have enough in your tax account as of December 31 to pay the taxes?  Good for you!  If not, you will want to increase the amount of each check that you save.  Anything extra is yours to do as you want.

And my daughter and my daughter-in-law?  They both saved 35% of their checks.  My daughter-in-law  had just enough to pay her taxes on April 15 and was delighted it had worked so well.  My daughter, who earned much less and had a much lower federal tax rate, had enough left in her tax account as of December 31 to take a once in a life time trip to Jamaica. She ziplined through the tropical forest that spring.






Hello Everyone,

Welcome to my blog.  There is so much misinformation out there about savings,  credit, budgets, taxes, annuities, retirement, mortgages … finances in general.  STUFF we think we all know about.

But we don’t.

I’m here to help.  I’m going to nag you about the things that you should be doing; I’ll tell you the things that you should already know.  Things your mother would have taught you – if she had known and you had listened.

You can take charge of your financial life.  Small steps can lead to security.  Knowledge is power.

I’ll tell you about the homeowner who didn’t realize that property taxes came due every year and how to budget for them; the young man who wanted to budget but had no idea how to get started; the father who lost over 60% of his investment because he couldn’t stomach the market upheavals.

Remember, there are no stupid questions; only questions that you don’t know the answers to.  And questions you don’t know to ask.