Finance: Rules to Live By on a Daily Basis

There are certain rules, not necessarily “laws” per say, just personal and developmental rules to live by to succeed in having the lifestyle you and your family deserve. While finance may be an easy concept to some, the majority of people understand it; however, have a difficult time sticking to it. They give up too easily. That’s a loophole for making financial errors and erroneous spending. Here are some tips that we have personally come to understand as Finance 101 rules:

For Personal:

1. Use Mint.com. It is by far the best budgeting program and a “follow the money” program. People often wonder where their money goes and Mint.com can show it for you through a pie chart or a bar chart on a weekly basis or monthly basis. It will also make a list of your biggest expenses (ex: child support, mortgage, home improvement, etc). We highly recommend you PRINT these monthly charts so for each month, you can analyze the income v expense ratio.
2. Never buy a new car. Try to minimize your monthly outgoing bills. If you can make a cash payment on a $2,000 – $5,000 vehicle, it’s great news for you since you won’t be paying monthly plus extra interest on a new vehicle. While they are nice and luxurious these days, a simple car will still get you to Point B and that’s what matters most.
3. If you have a truly hard time budgeting, buy yourself those VISA gift cards and create a category for each card: “Groceries, Entertainment, Bars, Clothing, Coffee, etc.” When it is spent, do not replenish the card until the new month; unless, of course it is for groceries. The best two methods for grocery shopping are: 1) buy meals as you go, or 2) shop once a week and make a list before heading to the store. The app, Remember the Milk can help you with this.
4. Pay the utility and service bills the minute you receive them. Don’t wait and forget later. You end up paying a $10 late fee. You will also know your true value in your bank accounts when the bills are paid immediately. There’s no guessing on the amount left over. Write on the bills date paid and BillPay transaction ID #.
5. If you have monthly payments that are the exact amount month-to-month, such as mortgage or cell phone plans, sign up for a continuing payment on Bill Pay. Do it for a 6 month interval and then renew. You can always stop it anytime but it helps on forgetting to pay the bills.
6. Use coupons!! Either store or manufacturer coupons. This can save you $5-$10 per transaction you make! My favorite two are coupons.com and shopathome.com. These are great for personal products that everyone needs as well as business office supplies.

For Business

1. If you have a smartphone, use the free apps given to you to help you keep track of your finances. To name a few: Expensify, Craigslist (should you need to buy furniture at a discounted rate), DropBox, PayAnwhere, Bills for iPhone/iPad/Droid, Docusign, Notability.
2. Have a separate business phone aside from your personal phone. Don’t mix the two. Leave your work at your business place when it is time. If you are self-employed and work from home, use a Pay-As-You-Go phone.
3. Drive your most economical car to work as the commute (should you have one) adds up fast. Also pack a lunch. If you like to go out, limit it to once a week. Do not go “out with the girls/guys” every lunch.
4. Use a receipt or coupon organizer to keep track of all your receipts for each month. Filing it away in a general “Receipt” Folder will guarantee loss as well as ineffective when needing to find that specific receipt. Expensify, an App in the App Store or Online, is a great receipt tracker.
5. Don’t make investments within your first year of the business. Limit it to the absolute necessity: advertising effectively, cheap business furniture if required, etc. No need to buy a brand new car for the business or spend frivolously thinking it’s tax-deductible. Start-up costs are NOT tax-deductible. The business must actually be making money in order to be tax-deductible.
6. Have a separate debit card for business. Do not mix transactions. You will be slapped and fined by the IRS for mixing personal expenses with business. Keep everything professional and simple. You may only deduct dinner expenses if you had a business meeting with a potential client/customer/venture.
7. Stay true to your word. While this may not seem like financial advise, when you speak honestly and truthfully, money will follow.

Just How Many Types of Taxes Are There?

1. A compulsory payroll tax is an automatic tax collected from employers and employees to finance specific programs. It is also known as a social-security tax. The FICA (Federal Insurance Contributions Act) tax is the major revenue to provide benefits for retirees, the disabled, and children of deceased workers. It is through this tax that the government finds funds for providing social security benefits and Medicare.
2. A direct tax is a tax that cannot be shifted to others, such as the federal income tax.
3. The federal government levies a tax on personal income and the federal income tax provides for national programs such as defense, foreign affairs, law enforcement, and interest on the national debt. The majority of tax laws were designed for military defense and the protection of the country.
4. A flat tax is another term for a proportional tax, which is a system with a constant marginal tax rate. Flat taxes in application often allow certain deductions and thus are a special case of a proportional tax.
5. A gasoline excise tax is an excise tax paid by consumers when they purchase gasoline. The tax covers the manufacture, sale and use of gasoline.
6. An indirect tax is one that can be shifted to others, such as a business property tax.
7. A luxury tax is a tax paid on expensive goods and services considered by the government to be nonessential.
8. A mass tax is a broad tax that affects the majority of taxpayers.
9. Medicare tax is used to provide  medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.
10. A progressive tax takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay. A progressive tax system might, for example, tax low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and high-income taxpayers at 30 percent. The U.S. federal income tax is based on the progressive tax system.
11. A property tax is a tax on property, especially on real estate, but can also be on boats, automobiles, recreational vehicles and business inventories.
12. A regressive tax is the direct opposite of “progressive tax” since it is a tax that takes a larger percentage from low-income taxpayers rather than high-income taxpayers.
13. A revenue tariff is a tax on imported goods which is primarily designed to generate revenue for the federal government.
14. A sales tax is a tax on retail products based on state’s sales tax. Arizona is 6.6%. The maximum AZ sales tax after local surtaxes is 10.6%
15. Self-Employment Tax is a tax rate the IRS determines, which is currently at 15.3% of self-employment profits.
16. A sin tax is a tax on alcohol and tobacco products.
17. The social-security tax provides benefits for retired workers and their dependents as well as for the disabled and their dependents. Also known as the Federal Insurance Contributions Act (FICA) tax.
18. A user tax is one that is paid directly by the consumer on a good, a product or a service.

Business Activities to Measure

Did you know accounting has two different categories? There’s managerial and then there’s financial. As you know, the purpose (or function) of accounting is to measure the activities of a business and to indicate by way of communication those measures to the owners.

Under Financial Accounting, a business always has to separate its transactions into three “activities”: Financing, Investing and Operating.

Financing Activities are transactions involving “external” sources of funding such as investing your own funds into the business or asking for a loan from a creditor. Don’t make the common mistake of assuming the loan is a type of “investment” in your business because in accounting terms, it’s not. Your loan is strictly a Financing Activity.

Investing Activities. Once the investment is in place, your business has the resources it needs to run the business and perform operation activities. An investment activity can include the purchase and sale of land, business vehicle, buildings, equipment and machinery (things that are long-term resources), and any resource not directly related to normal operations.

Operating Activities include transactions that relate to the primary operations of the business such as providing products and services to customers and the associated cost of doing so, like paying utility bills, taxes, advertisement costs, paying employees, rent and maintenance. These operating activities can be tax deductible (by the way) ONCE AND ONLY ONCE the business is in full operational mode. Start-Up Costs are not included in Operating Activities because the business must actually be providing a product or service in order for any operating transactions to be tax deductible.

Just remember, the first role of financial accounting is to measure, or keep a record of your financing, investments and operating activities.

Samples of Business Activities: 

• Your financing activities: $10,000 loan
• Your investing activities: Purchasing a truck at $6,000 and equipment of $3,000
• Your operating activities: $200 advertising and $800 office rent on top of $500 utilities (which does not include your cell phone bill, only an office phone, or a cell-phone used for business purposes only).

Is Moving Money to Another Bank Account You Own Considered Income?

When I was preparing to do taxes for “B company”, I stumbled upon a weird transaction. “B Company” owns two other companies (I and G) and therefore transfers funds between the three to cover overdraft fees, utility payments, rent payments, etc. Business owners have their own personal reasons why funds are transferred. However, my issue was that the previous accountant had manually input a transaction showing their “G Company” to be loaning funds to “B Company”, rather than just transferring. If you own the companies, you’re not loaning to yourself. That makes no sense. And you’re also not giving any income to that company. It’s already money you have – cash. And if you report that cash as an expense in one account and income in another, it seems awfully fraudulent even it its entirely misunderstood. You can’t report money twice.

To prevent reporting income or an expense that’s not actually existent, Quickbooks has two methods of recording the transfer:

1. Use the Transfer Funds button found in the Banking option in the menu bar.

This will show any auditors who choose to look at your books the transfer recording properly and that you’re in the clear.

A Reason to Begin Filing Federal Tax Returns

The IRS website released an article dated 2/23/2012 that the Revenue Service may have $1 BILLION for people who have not filed 2008 Income Taxes.

In order for any person to collect, the IRS requires the Income Tax Returns to be filed by April 17, 2012.

Does this article have anything to do with the fact that almost 50% of Americans don’t file Income Tax Returns? This heated debate has been on the news for the past two weeks. Maybe people can’t afford to file on top of paying taxes. Maybe that’s why people don’t file. Maybe others don’t know they need to file. While ignorance of the law is not an excuse, it just may be the real reason why so many people don’t file.

The IRS claims there is no penalty for filing a late return IF it qualifies for a refund; however, if you file and you owe them money, the likelihood of being penalized is great.

The article also shows a chart of people who had not filed in 2008 with a potential refund. This may be calculated by reviewing most recent tax returns of that individual. 29,000 individuals of Arizona did not file, leaving the total potential refund to be $24,913. In California, 122,500 people did not file. What are the chances those are lawyers, doctors and celebrities? Very likely! Yet when I see the full chart, the estimated total of individuals who didn’t pay in 2008 is only 1,089,000. Seems like an awfully small number in comparison with the reports going on today of nearly 50% do not file.

Does this mean the chart is flawed and incorrect, or does it mean that from 2008 to 2011, an insane amount of people just stopped filing or no longer had to due to insufficient funds? But maybe now is the time to begin filing again. Maybe you are that one person who is owed money from the revenue service and you don’t know it. Maybe this will motivate people to call an accountant and check with them on their likelihood (possibility) of receiving a refund.