Random Rambles: Adventures in Financing

(c) Jo Naylor (Creative Commons License - Flickr)

(c) Jo Naylor (Creative Commons License – Flickr)

Money. Hate it or love it, it's something almost all of us have to deal with. The transition from child to adult involves the inevitable conflict of wanting things and realizing that nothing comes for free.

Maybe you have the supplies to build or grow what you need, but you need to invest your time. Your time is valuable, so this isn't a free investment. (Don't undervalue yourself; your time is valuable, no matter what the assholes say.)

Maybe you want to skip the time investment, so you have to pay for what you want. (Maybe you lack the skills to make it, or maybe you're just lazy and don't want to spend the time–that's all right. I'm lazy too.)

When I was younger, money was magical. My mother (wisely) bribed us kids into working by dangling rewards for us. However, despite the introduction to basic bartering and finances, I never was really ready for life outside of the nest. Let's face it, financing, budgeting, and general life skills weren't taught in school. I watched my mother fight with her taxes, but it was frustrating and intimidating for her, therefore it was something I wanted absolutely nothing to do with.

At my school, we learned how to vote, but we weren't taught how to actually balance a checkbook–we were, however, taught how to write checks. We were taught how to spend money, but we weren't taught how to save it, how to plan ahead, and how to live anywhere other but in the moment.

As many of you are probably aware, my husband was laid off from his job after more than twelve years of employment at the same place. He found a new job, which he really likes, doing things that interest him. He's far, far happier now than he used to be.

However, he's a contract worker now. This comes with a variety of issues. First, taxes aren't withheld. That's our responsibility. Second, his employer is the in US, which adds some complexity to our situation.

Most importantly, we only get paid once per month instead of every two weeks. That's a huge adjustment. Instead of living pay to pay, I have to live in the moment and thinking a year in advance.

If I don't save the tax money, I won't be able to pay the government on time. That's not good. That means I have to think ahead, withholding enough for taxes, all while juggling our various bills.

This is not a skill set I was taught in school. Planning a year in advance for anything? Pft. I don't know about everyone else, but I grew up in an instant-gratification society.

There's nothing instantly gratifying about managing a budget. It's hard work.

So, here's how I'm doing it–manually. There are programs you can use to help, but I have opted not to use them. There's a reason for this: I am a hands-on learner. If I want to make a budget that works for me and my family, I need to see the numbers, play with them, prod at them in their devilish home in excel, and really get an understanding of what I'm looking at–and how I'm spending my money.

It's more work, but going over the financials bit by painful bit is how I learn what I'm doing right and wrong.

Please note: I am not recommending you do these things for yourself. I am not responsible for your financial decisions. What I do with my household finances works for exactly one financial situation: mine.

Please consider all of the information as a sharing of a single strategy.

You're welcome to use my strategy if it fits your situation, but nothing in this post constitutes as legal or financial advice. I'm not responsible for your choices.

Before I begin, I'm going to discuss some of the challenges my husband and I are facing, which are playing a huge role in our monthly and yearly finances.

Challenge #1: Sewage Flood.

Yeah, I'm still in debt from that. No, I still don't have a basement. One day, however, I will have a basement. But, for now… I need to pay off all of the debt from related expenses. (These include replacement of the furnace, replacement of the entire breaker box, and the rewiring of the pool. These three items cost in excess of $10,000 and weren't covered by insurance.) Insurance covered the cost of cleanup and materials for the replacement. However, because the basement wasn't to code, things outside of the cleanup sphere of influence needed to be addressed, we ended up with far more spent than insurance covered. That rode my credit cards–some is still riding my credit cards.

Plus interest. Can't forget the interest. Interest is the killer of souls.

Challenge #2: Withholding Taxes

We aren't sure how much the tax man is going to yank from us, but I'm anticipating the number falling somewhere between 39-49%. The lowest I've ever seen our taxes was 31%. The highest I've seen it has been 54%.

This year, I'm looking at an estimated 47% tax rate for my husband with provincial and federal taxes combined.

Challenge #3: Credit Card Debt

This ties to Challenge #1, but it is a problem in and of itself. Credit Cards are dangerous things. Sure, they can save your bacon when shit goes to hell–but once hell starts, it is excessively difficult to climb out of credit card debt. Of all of the challenges I'll face this year financially, this one takes the cake and the cherry on top.

Now, with the background established, I'll go into my method of addressing the problems.

Step One: Realistic Expenditures.

Most people think budgeting is about saving money and cutting costs.

Wrong.

It is about identifying and understanding what you are actually spending your money on. If you base your budget on idealistic situations, it won't work.

Budget based on what you're actually spending. That stops the surprises before they happen. But, here's the problem.

Most people (myself included) spend more than they have. That leads to the situation of debt, debt, and more debt. Step one, however, shouldn't change.

Identify what you're spending your money on. Know your income. Know your expenditures. Know what you're doing right.

Learn what you're doing wrong.

Step Two: Identify Critical Expenditures

My budget is broken into several different categories, including wants, needs, monthly bills, and yearly bills. So, in order to form my baseline budget, I took a close look at what I was actually spending and identified the items that were critical.

Critical is just that–you absolutely can't live without it.

For my household, this includes things like the mortgage and certain bills. (The internet and cell phone bills count for us, because my husband cannot do his job without them.)

This becomes the foundation of the budget.

If you're going to try looking at your finances in this way, here are some items you will want to consider for your critical expenditure list:

  • Mortgage/Rent
  • Minimum Credit Card Payments
  • Electricity/Hydro
  • Bills required for work
  • Food (Basics)
  • Taxes

Step Three: Identifying Luxury Expenditures

Life's stressful enough without luxuries, but you really need to know how you're spending your money. Learn to identify what you can live without. Luxuries are just that: things you can live without.

Make a list of these things. Order them by priority. How important are they to you?

Go ahead–make notations on the things you could trim out of your budget, but don't trim them out, not quite yet.

Step Four: Add it up. Weep.

This is the weeping phase, probably when you look at your total income versus total expenditures and realize they don't add up. You're probably spending more than you have.

I'm not going to say it's okay because it isn't–it's not good. Money worries are a huge stress factor. Finances have ruined many a marriage and will ruin many a marriage in the future.

This is the time to acknowledge and accept your actual financial situation.

For me, it's also the time to start making a game plan. After the weeping, cursing, and burning desire to burn things with fire. Coherency will typically take a leave of absence at this point, and that's okay.

It's normal.

The problem is, from my past experience, is people stop at this step. They don't move forward. They don't find ways to get beyond the current situation to a better one.

Some people are in the situation where they simply can't.

I was hoping to be out of debt in a couple of months, but it isn't happening. In our situation, the tax percentage we have to pay prevents us from being able to really attack our credit card debt and eliminate it from the picture.

Can I do it? Yes. It will take a long time and will require a lot of willpower to accomplish it, however. This leads me to the next step…

Step Five: Problem Solving, Brainstorming, and Fitting Square Pegs into Round Holes.

I know the tax bill next year will be devastating. However, I also know that credit card debt and interest is equally devastating. So, I decided to compromise.

I'm taking a risk. This is not advice or recommendations to do this. It'll either pay off or it won't. If it doesn't, I'll be in even more financial problems come next year. If it pays off, we'll be far more stable. It's a calculated risk. If I play the numbers just right, it'll work.

I know that my tax rate will be around 47% come April of 2016. So, in order to accelerate the repayment of my credit card debt, I am withholding 24% of the taxes and tracking the yearly withheld percentages and amounts. By withholding half of what I'll actually owe the government, I'm paying down credit cards faster; this lowers my interest payments and minimums each month.

In 3 months, once I have done some damage to the credit card bills, I will withhold extra taxes until my yearly tax withholding is at 47%. I'll have to slow down how much I pay back my credit cards, but at the same time, I will be able continue paying down the cards because my interest rate and minimums will be lower.

The calculations are a bit complicated, but it works out at the end of the day. I might be able to do accelerated tax payments for 4 months.

This is a bandaid and it comes at a cost. But, the bandaid will help the wound heal faster, even though it isn't an instant fix. What it does do is let me fit that square peg into a round hole. There's a fine line between being able to pay down credit card debt versus being trapped in an endless cycle of just paying off the interest accruing from the debt.

The goal of this is to balance the scales in the right direction. The ultimate goal is this:

Each month, I am able to pay off the following for each credit card:

  1. Interest Charged
  2. All New Charges/Bills/Etc
  3. Minimum Payment
  4. A Little Extra

So, here's an example, taken directly from one of my credit cards. This card is charged for a lot of our monthly bills.

Statement balance:
$3,948.66
Statement closing date:
05/05/2015
Credit limit:
$X (It's a secret.)
Minimum payment due:
$107.01
Minimum payment due date:
05/26/2015

Interest Charged:

$68.00

Interest ($68) plus Minimum Payment ($107.01) equals Baseline Payment ($175.01)

This card is charged roughly $800 a month for bills and various other reoccurring payments.

So, current payment for the card, factoring in 1-3 on the list is: $975.01.

I have actually paid $1,040 on the card in the month of May. That means I paid 64.99 more than the minimum, which classifies as a little more.

Some of you might be questioning my math at this point. Why pay off the interest and the minimum payment on top of the reoccurring bills? The minimum payment would be sufficient to cover the new interest and pay down the card a bit. Why the little extra overtop of this?

The idea is to eliminate all sources of debt from the card. Interest appears as a charge on the card. It's money you're spending each month. Therefore, it needs to be accounted for. That means it falls under “New charges” technically. I separate it as a way of seeing how much money I'm wasting each month simply because I'm carrying credit card debt. It motivates me to get rid of the debt.

The minimum payment amount is actually the baseline paying down the card amount. Each time I pay the minimum amount, I'm whittling away that much from the actual debt. The little extra is just a cherry on top.

I do this for each and every credit card I have with the exception of one card. This card is a financial card; it gets charged once a month for a service. (It's sort of like a loan.) I pay off what's charged each month for this card.

Now, here's a consideration: If I do not have any new charges going to a card, I will pay off the new interest and the minimum payment plus a little extra. The little extra might be a lot extra, if I have the money to work with.

If I don't, the little extra is something like $10.00. I have three rainy day credit cards with balances. They aren't getting new charges, so I pay off the minimum amounts plus interest plus a little extra to pay them off while I focus my attention on the card with the largest active balance and interest rate.

By doing it this way, the interest payments and minimum payments will shrink each month. That gives me more room to work. But, if I have the money to afford the previous month's higher minimum payment and interest charges, I pay that amount.

It prevents me from having to recalculate all of the math plus has the added bonus of paying off the cards faster.

If I do have a rainy day, I can then recalculate my actual minimum payments and interest charges and pay down the cards appropriately, thus saving a little money each month.

That's essentially it in a nutshell. It took me about four hours to go through the past few months and identify bills, but if you have banking software that does that for you, great! I needed to dig in and do it manually because that's how I think.

But, I walked away with a game plan, a method of crawling out of debt, and a realistic budget–one I can actually adhere to because it is no different than the reality of my expenditures.

Phew. Long post was long. Sorry about that.

Good luck with your finances. Money sucks.

Leave a Comment:

3 comments
Aaron Moser says May 21, 2015

You may want to see if you can/should make installment payments. In America, if you pay over a certain amount in taxes in a year, the next year you are required to make quarterly installment payments. If you don’t make payments equal to 80% of the total taxes owed for the year, you can be penalized. I believe you live in Canada so I did some quick Googling and it appears they have something similar.

I hope this doesn’t cause any unnecessary stress for you. I just want to make sure you are prepared. I have purchased some of your books and while I haven’t yet had the opportunity to read them, I am looking forward to it. You seem like a pretty cool person and I really hope to see you succeed in becoming a full time writer. You don’t need any unnecessary obstacles popping up.

Reply
    RJBlain says May 21, 2015

    In Canada, you do not play installments on the first year of self-employment income. The first year establishes your base income with them. Canada doesn’t have IRS’s love of penalization. It was the first thing I checked! 😀 (I was very relieved!!)

    Thanks so much, I really appreciate your thoughts–and I really hope you like the books when you get a chance to read them. 🙂

    Reply
Hendrik Boom says May 21, 2015

I’ve found the free software called ‘gnucash’ is pretty good for tracking income, expenses, assets and liabilities.

One thing it does that most consumer-grade proprietary software doesn’t is separating incurring an expense fro actuallly paying it. I found the distinction valuable when I was in the situation of having to defer bill payment.

Riughky peaking, you incur an expense when you’ve committed yourself to paying it, such as when you order something from the store. You actually pay it when the oney actually leaves your bnk account. Between those events, there’s a liability — i.e., a debt.

Professional accountants will have more complicated, stringent definitions intended to keep companies from bending the rules to make themselves look better on their shareholder statements and such, but this is the essence.

And gnucash is free software!

— hendrik

Reply
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