[Preston]

I am going to put myself up on the chopping block and give my plans for this next year with our finances. I'm open to feedback, but I think this is the best plan for us, all things considered...

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I’ve found myself in a spot I never thought I’d be in, within the next two months, The Credit cards will be gone. The only one left will be at 0% until November and I am going to knock that out closer to the date since I will have free use of that money until then.

This year, despite getting out of debt, were hit with a hard blow. By April 15, we will owe approximately $3700 in federal, state, and local taxes. This was due to low withholding and no local taxes being withheld from our checks as well as a School District Income Tax for our previous address I was unaware of that we have to go back to 2007 and 2008 and also pay penalties. I basically have to spend all our income in April to take care of this tax bill, and there is nothing I can do about it.

For 2009, we made about $65000. So I have based everything on that number. Our budgeted take home pay is $3500. We work as much overtime as possible and our income is usually higher than that, but I figure it’s better to underestimate income to make the budget easier.

The way I handle our finances is that we have two checking accounts, one with US bank (USB) and the other with a local Credit union (CU). The USB account is one I have had almost 10 years now and I honestly have had very little trouble with them. It is a free checking account and pays no interest, but there are no fees. The CU account pays 3.5% APY as long as I do 12 debit transactions a month. I split our paychecks up so about $1200 is going into CU account and that is our cash flow account. Gas, groceries, and everything else gets paid from this. It is also where I have been paying the mortgage out of to squeeze our budget tighter as we see we have less money in there we don’t spend it as much. I try to keep the minimum balance at $1000. So this, in a way, is our emergency fund.

The USB account is tied into all our debts and serves as the central nervous system for our finances. I also have a CC with USB which our regular expenses get charged to (internet, cell phone, netflix, etc) and it is paid in full every payday and always has a zero balance when the bill is due. I call it my ‘delayed’ debit card. I keep a penny in USB account between paydays. I’m that tight.

Because of the tax bill we received I have also opened an ING account which $100 of every paycheck gets transferred to. The purpose of this account is for when taxes come due next April I will have this money set aside so it will not affect us like it is this year. Furthermore, it will earn a little bit of interest. In an extreme case, It would also serve as an Emergency Fund. During tax season Next year (Jan-Apr) this amount will be temporarily raised to $150.

I have also changed our withholding on our paychecks to try and avoid a huge tax bill again as well as making estimated payments throughout the year, which I will try to do out of our cash flow without touching this account.

I will pay next years taxes out of ING account. Anything left over will be transferred from the account will be either applied to the mortgage, the EF, or split between the two. Then I start over again with this account balance.

To lower our tax bill I am contributing to 401k all year long. Matches to 3%. Currently we contribute 6%. Last year we didn’t start until August. Also, We have a Flexible Spending Account which will further lower our tax liability. (I LOVE this thing, BTW, it’s like medical expenses don’t exist anymore since I only go by net income for budgeting.)

Our paychecks are split up 65/35 to USB/CU. Using this method, I have estimated that we will have about $2500 by the end of the year in the CU and $6500 by the end of tax season. Which would cover us for four months.

In June, our union contract gives us a 3% raise. This comes out to be another $50/paycheck. My plans for this are as follows. I will raise 401k contributions to 7%. There may not be a match, but I am not ready to get involved in IRA’s at this point. I would like to do more research before I get involved with them.

Secondly, I will raise the amounts going to the ING account to $125/paycheck.

The remainder will be added to our cash flow. So, it will basically be like it never showed up.

Our debts this year are as follows, starting in June.

$10500 owed on a timeshare. 10% interest. $245 monthly.
$4300 on a 0% APR CC until November. $50/monthly.
$6500 on a student loan at 3%. We file separately so I don’t get the deduction. $85 monthly.

So $21300 in non-mortgage debt. We currently have a $2000/month shovel on our debt snowball (however, will be bigger because the monthly payments associated with these loans, but I will not include them so we can be more intense.) Leaves us with roughly 11 months, so the rest of the year to clean this up. Then we will be debt free, minus the house around the end of tax season next year. I will spend The first few months knocking out the timeshare, then Sept & Oct to knock out the CC before the interest shows up. Then knock out Timeshare by Christmas (good Christmas present). After that the Student loan will be a piece of cake.

I do have a line of credit at 7.25% of $10000 which I am considering using for the timeshare. We may not have enough deductions to itemize next year, so it may be for the better. Math doesn‘t change much and I would put it as the same debt in the snowball, but would save interest.

I am continuing to pay the mortgage out of the CU account until the end of the year, when I will switch to USB and then EF can grow a lot faster.

I know ways this can be more efficient (less ING Deposit, but I don’t want to mess around with this.) and overall feedback as to whether or not this is a good plan of action. I open myself to criticism with this.

 

[Greebo]

I’ve found myself in a spot I never thought I’d be in, within the next two months, The Credit cards will be gone. The only one left will be at 0% until November and I am going to knock that out closer to the date since I will have free use of that money until then.

AWESOME

This year, despite getting out of debt, were hit with a hard blow. By April 15, we will owe approximately $3700 in federal, state, and local taxes.

OUCH

For 2009, we made about $65000. So I have based everything on that number. Our budgeted take home pay is $3500. We work as much overtime as possible and our income is usually higher than that, but I figure it’s better to underestimate income to make the budget easier.

Wise

No comment on the accounts - works for me if it works for you.

Me, I'd lose the CC and do it all on debit, but if you maintain a 0 balance I won't yell at you. Swim with the sharks if you want...

Because of the tax bill we received I have also opened an ING account which $100 of every paycheck gets transferred to. The purpose of this account is for when taxes come due next April I will have this money set aside so it will not affect us like it is this year. Furthermore, it will earn a little bit of interest. In an extreme case, It would also serve as an Emergency Fund. During tax season Next year (Jan-Apr) this amount will be temporarily raised to $150.

I was thinking perhaps you couldn't do withholding because you were self employed but...

I have also changed our withholding on our paychecks to try and avoid a huge tax bill again as well as making estimated payments throughout the year, which I will try to do out of our cash flow without touching this account.

I think you are getting into overkill here between this AND the ING account. IF your tax bill was $3,700 then that's $308 a month you need to have withheld. You should be able to do this entirely with withholding adjustments. Only do the $100/mo extra if you cannot make the withholding work.

To lower our tax bill I am contributing to 401k all year long. Matches to 3%. Currently we contribute 6%. Last year we didn’t start until August. Also, We have a Flexible Spending Account which will further lower our tax liability. (I LOVE this thing, BTW, it’s like medical expenses don’t exist anymore since I only go by net income for budgeting.)

Now you are definitely in over-reaction land. Drop the 401k contribution to 3% for the match only. The other 3% needs to continue going to debt elimination. You could get hardcore and go to 0% but I don't yell at people for taking the match. That's 100% instant ROI after all.

In June, our union contract gives us a 3% raise. This comes out to be another $50/paycheck. My plans for this are as follows. I will raise 401k contributions to 7%. There may not be a match, but I am not ready to get involved in IRA’s at this point. I would like to do more research before I get involved with them.

Your only option is Roth IRAs - but you're really not at the point yet where investing is your smartest move.

If you fix the tax issue going forward with withholding adjustments, those adjustments occur on a % basis so as your income goes up, so do withholdings. That means as your income goes up, you won't end up owing more to the Gov't, as long as the withholding is right.

I'll talk about why when it *IS* time to invest, you want to do the Roth next later.

Secondly, I will raise the amounts going to the ING account to $125/paycheck.

I wont stop you on this but I think you won't need nearly this much if you do the withholding properly.

Pay your debts off in this order:

$4300 on a 0% APR CC until November. $50/monthly.
$6500 on a student loan at 3%. We file separately so I don’t get the deduction. $85 monthly.
$10500 owed on a timeshare. 10% interest. $245 monthly.

Snowball style.

So $21300 in non-mortgage debt. We currently have a $2000/month shovel on our debt snowball (however, will be bigger because the monthly payments associated with these loans, but I will not include them so we can be more intense.)

Good shovel - means the tax bill really isn't a problem - you just slow down debt repayment until the tax bill is paid.

I do have a line of credit at 7.25% of $10000 which I am considering using for the timeshare. We may not have enough deductions to itemize next year, so it may be for the better. Math doesn‘t change much and I would put it as the same debt in the snowball, but would save interest.

Time share is interest deductible, right? So your at the 25% bracket I think:
10k * 7.25% vs. 10k * 10% = $275 savings in interest. Your interest on the 10k is 1k and the tax deduction on that gives you a $250 reduction in taxes - so your net savings by going to the LOC is $25.00. Whooooo peeeeee dooooo. Close the LOC and pay off the damn time share. Stop fiddling.

I think you, in this order:
1) Adjust withholding substantially taking out an extra $320/month to give you a SMALL refund next year
2) LOWER 401k to 3% for now
3) Focus on the tax bill until that's covered for this tax due date
4) Pay off all non mortgage debt + the time share
5) Build up your fully funded emergency fund

THEN you look at the investing.

3% to the 401k still. At 65,000 a year, you should target investing $9,750 per year. 3% to the 401k is $1950 leaving $7800 to go.

The next $5000 goes to a ROTH IRA with AFTER TAX MONEY.

That leaves $2800 more to the 401k or another 4.3% - call it 4% for $2,600 so a total of $4550 to the 401k

Why?

By using AFTER TAX money to go into a Roth, you increase the value of your returns by your tax bracket at retirement.

If you put $100k in a 401k and $100k in a Roth at the same time (not actually doable), over 40 years at 10% each would grow to 4.5 million dollars. However, after taxes, the 401k would effectively only be worth $3.4 million because as you draw money from the 401k, it gets taxed. With the ROTH, however, the 4.5 million is tax free.

In your case, putting $5,000 a year into a Roth over 20 years means you put in 100k but get back 286k tax free. Meanwhile the $4,450 to the 401k gets an instant 3% match (4550 + 1950=6500/year) which is awesome, and if it gets 10% it grows to $372k but after taxes is only about 280k.

That's why you don't skip the Roth!

I think this tax thing has you reacting emotionally - and that's leading you to overreact.

 

[Preston]

1) Me, I'd lose the CC and do it all on debit, but if you maintain a 0 balance I won't yell at you. Swim with the sharks if you want...

2) I think you are getting into overkill here between this AND the ING account. IF your tax bill was $3,700 then that's $308 a month you need to have withheld. You should be able to do this entirely with withholding adjustments. Only do the $100/mo extra if you cannot make the withholding work.

3) Now you are definitely in over-reaction land. Drop the 401k contribution to 3% for the match only. The other 3% needs to continue going to debt elimination. You could get hardcore and go to 0% but I don't yell at people for taking the match. That's 100% instant ROI after all.

4) Pay your debts off in this order: Snowball style.

5) Time share is interest deductible, right? So your at the 25% bracket I think:
10k * 7.25% vs. 10k * 10% = $275 savings in interest. Your interest on the 10k is 1k and the tax deduction on that gives you a $250 reduction in taxes - so your net savings by going to the LOC is $25.00. Whooooo peeeeee dooooo. Close the LOC and pay off the damn time share. Stop fiddling.

I think this tax thing has you reacting emotionally - and that's leading you to overreact.

1) I cannot just do these transactions on debit. I tried. For some reason my debit card will not work on the websites of the cable company, cell company, etc, so I just kept this open credit line and manage it like a debit account. No Biggie.

2) This is not just about the taxes, this is forcing me to keep added EF so I don't have to dip into credit accounts for unless I really need to. Kind of a backup EF.

3) 50% match on 401k contributions up to 3%, and my understanding is that I have to contribute 6% to get the 3%, so it's instant 50% return, which is a step in the right direction.

4) I'm not doing this snowball style -- more a debt 'tsunami' as I've read. It is most important for me, psychologically, to pay off the timeshare. The interest rate, and what the debt means to me far outweigh paying the student loan or the other stuff first. I lividly hate the timeshare payment. I lividly hate the timeshare debt, and this pushes me to stretch the budget harder to pay it all off earlier. 0% and 3% interest rates don't bother me either. Remember, my 'snowball' is different, I go by which debt I hate the most... and this applies to my system, which has worked well for me. Furthermore, I've found out the timeshare finance company is involved with Bank of America.

5) By my estimates, we won't be itemizing, so it makes more sense to get the instant return by paying the amount of interest equal to what the tax break would be. I still view it as the same debt and I'd rather give the money to the local credit union than the timeshare company.

Don't think I'm being stubborn, just explaining where we are. I do appreciate the feedback though.

 

[Greebo]

2) This is not just about the taxes, this is forcing me to keep added EF so I don't have to dip into credit accounts for unless I really need to. Kind of a backup EF.

Your original presentation did not make it sound like it was for EF purposes but tax purposes. Doing the withholding PLUS the extra EF funds works against your debt tsunami.

3) 50% match on 401k contributions up to 3%, and my understanding is that I have to contribute 6% to get the 3%, so it's instant 50% return, which is a step in the right direction.

Oh ok so it's 50% match up to 6% contributions - in which case, ok do 6%. It slows your tsunami but 50% is a huge instant ROI.

5) By my estimates, we won't be itemizing, so it makes more sense to get the instant return by paying the amount of interest equal to what the tax break would be. I still view it as the same debt and I'd rather give the money to the local credit union than the timeshare company.

Have you tried itemizing vs. not itemizing just to check which does better? You can do it on TurboTaxOnline for free and NOT pay until you file.

Don't think I'm being stubborn, just explaining where we are. I do appreciate the feedback though.

DO WHAT I TELL YOU DAMNIT!!!

 

[Preston]

Have you tried itemizing vs. not itemizing just to check which does better? You can do it on TurboTaxOnline for free and NOT pay until you file.

Yes, I have considered all scenarios, and the numbers come out that it is better to just take a standard deduction across the board. Considering the numbers are about the same, and one way is guaranteed I'd rather pay less interest.

The only way this would become an issue is if we have large out of pocket medical expenses, which is highly unlikely. And at that point i would not really be concerned about debt reduction.

The purpose of the ING is to taxes AND EF. Mainly taxes -- we will have to do estimated payments to local so this way I will definately have money put aside for this purpose.

 

[Greebo]

The purpose of the ING is to taxes AND EF. Mainly taxes -- we will have to do estimated payments to local so this way I will definately have money put aside for this purpose.

AHHHH! Now the light bulb is on. I didn't realize there were estimated taxes in the mix. My bad!

 

[my4littlebuffaloes]

Next year though, you shouldn't have back taxes and penalties, so your estimated taxes will be lower AND you shouldn't get hit with such a large bill at the end.

my cable company won't let me use a debit card either, BUT I can do an electronic debit directly from my checking account. I do not have to pay any of my online bills with a credit card. Try that option.

Good luck!

 

[monkeywrangler71]

I don't know anything about your crazy confusing tax system so I just have a couple things to add.

Your current $2000 debt snowball - is this after you increase your withholdings, 401 contribution, and extra ef/tax savings account? It seems like you are planning to redirect a lot of income, maybe one or two can wait until next year. You won't have backtaxes owing next year, and with your debt paid off you will have enough from your snowball to raise any extra taxes well before April.

I like your savings account idea, with the rollover on to the mortgage if it isn't needed at year end. You are very good at coming up with creative ways to 'trick' yourself into saving extra. You will find that ability very useful when you are out of debt, maintaining a sense of urgency is not easy when you don't owe anyone except yourself.

I just wanted to suggest that you pay the cc a month earlier, just in case something comes up. I assume the rate skyrockets in November, and you shouldn't risk leaving it to the last minute in case something comes up and you get caught short.

 

[Preston]

Your current $2000 debt snowball - is this after you increase your withholdings, 401 contribution, and extra ef/tax savings account? It seems like you are planning to redirect a lot of income, maybe one or two can wait until next year. You won't have backtaxes owing next year, and with your debt paid off you will have enough from your snowball to raise any extra taxes well before April.

I just wanted to suggest that you pay the cc a month earlier, just in case something comes up. I assume the rate skyrockets in November, and you shouldn't risk leaving it to the last minute in case something comes up and you get caught short.

Feedback taken and the more I thought about it, the more it made sense to NOT go crazy saving for taxes. I am currently saving $100/paycheck through tax season then I am dropping that to $75/check. Next Jan-April, I am raising that to $150 JUST IN CASE, but I am not sweating it. I am going to make estimated quarter payments throughout the year, but I am going to try to NOT touch the ING account for this. Kind of ass-backward, but if I can squeeze it out of cash flow I will have more to apply toward mortgage at the end of the year.

Our $2000 shovel is after EVERYTHING. There are a few months where something comes in that drops that (car insurance in June for $300) but other than that we are hitting hard. We live off of $1500 a month USUALLY.

But I am also thinking we're going to drop the shovel to $1500 so we can actually live a little nicer. We're through the worst of the storm, now we're just got to ride it out. I think clearing $48000 in Credit card debt in two years on a $~$60k income is pretty good. this while knocking out another $9000 in other loan payments.