Budgeting and Mom’s Working

I recently had an interesting discussion with a neighbor who is a real estate agent.  Our economy in Northeast Ohio is not exactly booming and I asked her how this was affecting the local real estate market.

My neighbor told me a story that concerns me because I think that it is probably all too common. 

 My realtor friend was showing homes to a young couple who was expecting their second child and wanted to purchase a home in a price range that would allow the mother to stay home with the children.  As they looked through the homes within this price range, the couple found things wrong with every home.  Nearing the end of an exhausting day, they found a home which seemed to meet their expecatations , until they entered the master bathroom.  To their dismay, there was only a single sink and the bathroom was apparently too small to add a second sink.  They ended the day of househunting discouraged, but the realtor promised to check for new homes that might have hit the MLS and expand the area in include some other nearby desirable communities.

When they met the next morning, the couple announced that their price range had increased almost 50%.  When the realtor asked about this sudden windfall, the couple announced that they realized that they just couldn’t  “live without” a bathroom with double sinks, so they decided that the wife would return to work.

I don’t want to judge this families decision, but I will just ask a question ”How much is a double sink worth?”   You can sacrifice many “can’t live without’s” in this question:  a new car every few years, certain clothing manufacturers. 

This family may have sacrificed treasures that will “last” …memories and  time for nurturing during the formative years of their precious children’s lives.

Budgeting to Live on One income!

I know that I may step on more than a few toes with this post, but I truly believe that this is the best advice that I have to give newly married couples.  It’s pretty simple to understand, but very difficult to actually implement!

So here it is:  Live off of one spouses’ earnings and put 100% of the other’s spouses earnings in some type of savings account that is not easily accessible. (always have a 3 to 6 months of living expenses in an emergency savings that is easily accessible.. but that’s a subject for another post!)

I wish that someone had counseled us to consider this prior to our leap into home ownership before we had even brought home our first double paychecks!  Seriously considering the wisdom of setting a couple’s standard of living at one spouse’s earnings level is perhaps even more important in the economic environment of today with the increasing lack of job security.

For any readers who may be at this stage of life or newly married, let me share our experience!  As a newly married couple, my spouse and I both had recently graduated from college with professional level jobs and salaries of more than we imagined that we could possibly spend!  No more college living or generic canned goods and macaroni and cheese dinners for us!

Before we had even put a paycheck in the bank, we were out looking at new homes!  We easily qualified for a loan on a custom built starter home (even though the interest rates were over 13% in the early 1980’s!)   We purchased a few quality pieces of furniture, but didn’t go too overboard.  We were both still driving our college cars; a ten year old Honda Civic 5 speed with no A/C and an even older Chevy Impala, so we weren’t exactly living the high life!

Some problems with the cars forced us to replace those, though we did purchase used, rather than new (a financial lesson that I learned from my father and have only broken once in my life!)

But there were quite a few expenses that we hadn’t considered…. property taxes on our brand new home, home, car and health insurance, eating out because neither of us were in the mood to cook after long days at the office, more gas money to commute to jobs in the city from our suburban haven!

All that money that we couldn’t imagine spending from our two paychecks wasn’t going as far as we thought! 

About a year later, I was studying for the CPA exam and working 50-60 hours a week.  I was tired all the time and then began having stomach pains, which I attributed to an ulcer.  After a couple of months of these bothersome symptoms, I finally went to the doctor.  As an educated woman, you would think that I would have previous considered the explanation that the physicain had:  I was pregnant!

This was about ten years earlier than we had planned for this momentous news, but we were still thrilled!  Until… a month later my husband was unexpectedly given his pink slip from his employer!   Now we had issues!

No savings to speak of, a house payment based on both of our incomes and a baby on the way!

Everything worked out in the end, with hubby getting a job after about four months of unemployment, but the financial stress of those four months made it seem like four years! 

We learned our lesson and the next home that we purchased was based on a budget with only one of us working.  This allowed me the flexibility to stay home during the preschool years when my next two children were born.

In today’s economic environment of uncertainty, this advice would seem to make even more sense.  It also allows the choice for mom to stay home if she wishes, rather than being enslaved to a mortgage payment.

I’ll share a story about from a realtor friend in my next post.

Tax tips to save you money!

Every year I see the same mistakes that people make which cost them big bucks at tax time!

Most of the mistakes, and extra taxes paid, could be avoided by communication between you, your CPA, and a financial advisor who has some tax knowledge and experience!

The most common mistake that I see every year is the sale of stocks with apparently no consideration as to the impact of short term vs long term capital gains on taxes!  When I see a large number of short term sales (which are taxed at a  higher rate than stocks that are held for a year or more) I advise my clients to tell their broker that I would like to discuss the tax ramifications before making future  sales.   If nothing else, this keeps the broker/advisor “honest” knowing that someone who understands what they are doing is keeping an eye on them!   Of course the broker usually becomes defensive and says that of course he/she considers the impact of taxes, but that this was a “high” point that they just couldn’t pass up, and that the great gain that they attained for the client outweighed any lost taxes.  

Well, being the accountant that I am, I decided to test those claims, and I have yet to find a situation where the brokers claim was true!!  More likely, there was a hot new stock or fund that they would make a big commission for selling, so they had to dump one of your other funds/stocks to buy it!  I don’t want to give the impression that ALL brokers and financial advisors are out to make a buck, with no consideration for your well-being.  In fact, the definition of a  ”fiduciary” requires that an advisor who works under the RIA designation as a fiduciary MUST work in your best interest.  Unfortuntely, there are way too many advisors and brokers out there who do not work as fiduciaries.   If you’re not sure, ASK YOUR ADVISOR and ask for proof!

And that leads me to my next bit of advice!   If you are paying a financial advisor/broker a % of assets under management, make sure that you or your tax professional takes the deduction on your Schedule A under miscellaneous deductions.  Only the portion that is greater than 2% of your AGI is deductible, but since most people’s portfolio is more than their AGI, and some advisors actually charge 2% of assets under management, there’s a good chance that you will get a deduction! 

As a side note, I personally would recommend using a CPA who is a Registered Investment Advisor as my first choice for investments, with my second choice being a “fee only” CFP (Certified Financial Planner)   to handle financial investments.   My last choices would be insurance sales people (they tend to push annuities, which are rarely the best option) or broker/dealers.

I’ll share more of my opinionated opinions on fee structures of financial planners later!  

Why would a CPA blog during tax season???

Why am I blogging in the middle of tax season, when I’m turning away new clients due to lack of time?

I’m not exactly sure, except that I need a break from all those numbers and need to use the other side of my brain for a while (is it the left side of the brain that is supposed to be the more creative side or the right??)   I also need to vent!!!

I have had more than one new client this year who has started a businesses with no clue as to what the tax ramifications!  There was no consultation with an accountant or an attorney and no tax estimates were paid on self-employment income.  If you are toying with the idea of starting a business this year, do yourself and your tax preparer a favor and spend a few bucks to get professional advice prior to making the plunge! 

Setting up a bookkeeping system from the very beginning will also save you lots of money in tax prep fees since that person won’t need to spend billable hours trying to make sense of an Excedl worksheet, or even worse, a pile of business receipts!

I’ll write a post on some of the considerations in starting a new business when I have more time after tax season!

Second, if you plan to change to a new tax professional, don’t wait until April (or even the end of March) to call that person.  Most true professionals will want to spend some time with you going over your financial details and questions, but most will not have the time to consult with a new client at this stage of tax season.  Personally, I will not take clients this late.  I will offer to file an extension for them, and explain that they may owe an interest penalty if there is tax due when the return is filed after April 15th.  I’ll be honest with you and let you know that my experience working for different firms over the years, is that returns that come in at this late date are “pushed through” with the last minute rush and often go out with mistakes!   Another undesirable option, in my opinion, is to go to a walk-in tax service and have a return prepared by someone who (maybe)  completed  one nighttime tax course.

Enough rantings for now.. back to the 1040’s and such!

Why I chose my blog name: “Wealth that Lasts”

I am a financial professional and a CPA.  I work with clients everyday and help them plan and organize their financial lives.  I have developed a personal mission and passion to help others recognize that organized and orderly personal finances can reduce stress and allow us to enjoy the things that truly matter!  

That may be something different for you, than it is for me!  For me, it is spending time with the people that I care about, serving others and my relationship with God.

A question that I frequently encounter after a speaking engagement, is why there isn’t more sound financial advice and counsel available to those without million dollar portfolios!   My passion is to help everyone be a better financial steward; whether you’re pulling in a seven figure income or barely making ends meet. 

I hope to be able to share some of the financial and life wisdom that I have attained over the last 25 plus years in the financial industry with those who want to get their money and finances under control and experience the freedom to live life to it’s fullest!Let me know if there is something in particular that you would like for me to write about!