This is the last segment to our discussion on the common financial mistakes made by individuals and couples. We have discussed estate planning issues and how mistakes can be costly, time consuming, or both. Secondly, we covered financial planning and investments. Clearly, mistakes in this area can be very costly. The last area is taxes. While this can cost thousands when mistakes are made, you can at least be comforted by the fact that yours and my uncle (Sam) will be the benefactor.
If you are like me, benefiting Uncle Sam is not my idea of the best relative to benefit. Paying too much in taxes is a significant problem for many individuals. Try reading the tax code and you will understand why it is easy to overpay taxes.
Overpayment can occur in a number of ways. Failing to properly track expenses that may be deductible is crucial. Once the money is spent it is obviously gone from the budget. But, if the record of the expenditure is also lost and the item was deductible, now the reduction in tax liability is also lost. The ten dollar bill placed in the Salvation Army kettle or other charity's collection plate, not only costs you ten dollars but may also cost another two or three dollars in higher taxes because the deduction was not taken.
For the self-employed this is a critical area. The need for items at the supply store or on-line could result in cash being spent or items added to personal charge cards. If these items are not added to the books of the business, the impact can be even more severe since not only will the income taxes be higher, but also self-employment taxes.
Failing to track the proper basis is another area where an incorrect amount can cause higher taxes. Dividend reinvestment programs are a popular way to invest. However, ever time a dividend is paid and additional shares are purchased, this is an increase to the tax basis of the investment. While many companies now track this information, many still do not or the history is too old. Thus, if the shares are sold and the actual cost basis is not known, the correct gain cannot be calculated and over payment of taxes may occur.
Not knowing what is deductible is another area where failing to take a proper deduction can cause the taxable income to be higher than it should. While very boring, reviewing the IRS form 1040 instructions each year may yield very important information.
The tenth financial mistake is failing to coordinate all of the financial objectives. Between retirement accounts, taxable investments, personal wealth accumulation, all of the insurance programs, estate plan, and tax strategy, it is very easy to be spending more money than you should because many of these areas are working against one another rather than together. The most common example I use is the use of emergency funds. I prefer my clients to have two types of emergency assets. The first is the put and take account. This is the amount used each year at least once, and sometimes more often. Once the money is taken out for the emergency, the account needs to be replenished to be ready for the next time it is needed. The importance of this account is easy and quick access rather than high income. The second level emergency account is the 'feel good account'. This is the amount of funds needed for the major problem or job loss. This may be ten to thirty thousand or more depending upon the client. Since this may never be accessed or only once in many years, it should be placed where reasonable income can be created, but still be available if and when it is needed. While many have this second type of account created, they may also have cash in savings bonds or life insurance policies that they do not readily think about as being available. But these assets are available and thus could serve dual purposes.
Thus, instead of having the second tier emergency funds invested conservatively, the value in the savings bonds and life insurance policy may actually satisfy the emergency fund needs. And if so, the cash investments previously used for emergency funds could be shifted into longer term investments and potentially increase the returns over the years.
Another area is the use of life insurance and estate planning. The ownership of significant life insurance may create issues with the estate plan if the plan was not created correctly or if the life insurance was not structured properly. Thus working with a CFP or a professional knowledgeable in all of the areas of your financial life, may find ways to reduce costs or prevent unnecessary expenses.
For help with managing investment assets, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.