Telephone Excise Tax Refund

This year the IRS will be issuing the most widespread refund in the history of the IRS: The Telephone Excise Tax Refund. This one time only credit is available in 2006 only and, according to the IRS, “is designed to refund previously collected long distance telephone taxes.” The standard amount available to taxpayers is between $30 and $60, according to total number of exemptions listed on the 2006 tax return. (Ours is $60.) Taxpayers also have the option of manually calculating the amount owed to them, but they’d have to either: 1) review the last 41 months of phone bills, or 2) review the last 2 and apply a forumula, determined by the IRS.

More info can be found here.

Don’t forget this! It’s found on line 71 of the 2006 1040.

Refund Anticipation Loans

I thought that I’d warn all those who are getting ready to get their taxes done to STAY AWAY from the refund anticipation loans (RALs). These are basically very high interest short term loans that the preparer will make to the taxpayer. The taxpayer benefits because they get their refund 8-15 days sooner. The preparer benefits because of the incredibly high fees that they charge the taxpayer. I know that the gears of our country run on the grease of capitalism, and this is a free-market, “people are free to choose” yadda yadda yadda. People, RALs are a ripoff.

From here:

Based upon the prices for RALs in 2005, a consumer can expect to pay about $100 in order to get a $2050 RAL from a commercial tax preparation chain this year. This loan fee includes the fee for the “dummy” bank account used to receive the consumer’s tax refund from IRS to repay the RAL. The effective APR on this RAL would be 187%.

 

The fee for the RAL plus the fee for tax prepration, which average about $120, would total about $220. If the consumer chooses a tax preparer that charges a system administration or application fee, in the neighborhood of $30 per loan, the total would rise to $250.

 

For the 2005 filing season, we estimate the APRs on RALs ranges from about 40% (for a loan of 9,999) to over 700% (for a loan of $200.) We also continue to report a version of the APR that includes administration or application fees, if they are charged, because those fees when charged also represent a cost of the credit for a RAL. For loans with administrative or application fees, the fees can translate into APRs of about 70% (for a loan of $7,000) to over 1,700% (for a loan of $200).

Also read here.

I’m a CPA, work at a CPA firm, and we do not offer RALs.

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Best Way to Reduce Debt?

While browsing my blogroll today, I noted the following article from Adult ADD and Money. Basically, this author says that the best way to get out of debt is to follow these steps:

1.  Pay your monthly minimums on all of your credit accounts.  (Auto payment, CC payment, H.E.L.O.C. payment, etc.)
2.  Pay your monthly bills.
3.  Stay on your budget throughout the entire month.
4.  Put as much extra cash into your savings account as you can.
5.  At the end of the month, send a single extra payment (as MUCH as you can!) to the credit account with the lowest balance.
6.  Rinse and repeat.

What i found interesting is step 3…”Stay on your budget throughout the entire month.” After the deposit of our check on Friday, and after we had all our monthly minimum bills paid, I found that we had 411.33 in the account. This was the goal, and then after the next paycheck we are going to immediately pay all we can afford on our first target (the student loan). This article suggests that you should not be tempted to immediately pay down the debt right after the paycheck – instead, you should take that money away from your checking account, put in an account that is not quite as accessible, live on your budget for the month, AND THEN make the big lump sum payment to the creditor. It’s a great idea…I can see how you can get yourself in trouble if you’re too anxious to pay down your debt. Thanks for the great advice!

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Should I do this?

I had a great lunch yesterday with some of my best friends: My neighbor across the street (and best friend), his pastor, and 2 others. We always have some topic that we like to discuss…for example, we’ve talked about beauty, truth, friendship; we do this about once a month or so. Anyway, I requested that we discuss communication in the marriage and I told them about “the issue.”

The funniest solution to my problem was for me to grab the family credit card and go blow $1,000 on some worthless crap, go back to my wife and say, “okay honey, we’ve both done something stupid – now let’s talk.”

Yeah, I know. There’s no way that it’s going to happen, but it was funny. I wonder how often stuff like this happens: You spent money, so now I get to spend money.

Envelope Budgeting

I’m ready to confess.

I’m not a budgeting guru…I’m a CPA and I’ve NEVER in my life kept myself to a budget. In nearly 14 years of marriage, my wife and I NEVER held family finance councils. You know, the funny thing is that I know a lot of CPAs who let their wife do all the accounting, write out the bills, etc. It’s like the guy who lives in Utah and never skis…

 Anyway, I sent my wife to the store last night with a very specific errand: to spend no more than $100 in groceries for the week and then go to an ATM to withdraw a specific amount of cash to put in our various envelopes. When she came back from the store and I found out she paid too much at the grocery store, wrote a check for $80 over the grocery amount, then visited the ATM and took out some more cash and it didn’t add up to what I had sent her to do, I got pissed. She was going to gas the car up with some of the enveloped cash, but it was too late and the attendent wasn’t there so she used the debit card. I don’t know why, but when she came home and told me I was pretty upset. I’m so lame, I just wanted it to be exact to make this debt reduction pill easier to swallow, you know? So, what do I do? Pout around the house all night. AARGH! – but then I read on Dave Ramsey’s site:

Budget each paycheck. Budget is a dirty word to most people, but you must budget down to the last dime if you’re going to successfully implement the envelope system.

Divide and conquer. Of course, there will be budget items that you cannot include in your envelope system, like bills paid by check or automatic withdraw. However, you can create categories like food, gas, clothing and entertainment.

Fill ‘er Up. After you’ve categorized your cash expenses, fill each envelope with the money allotted for it in your budget. For example, if you allow $100 for clothing, put $100 in cash in your clothing envelope for the month.

When it’s gone, it’s gone. Once you’ve spent all the money in a given envelope, you’re done spending for that category. If you go on a shopping spree and spend the $100 in your clothing envelope, you can’t spend any more on clothes until you budget for that category again. That means no visits to the ATM to withdraw more money!

Don’t be tempted. While debit cards can’t get you directly into debt, if used carelessly, they can cause you to over-spend. There’s something psychological about spending cash that hurts more than swiping a piece of plastic. If spending cash whenever possible can become a habit, you’ll be less likely to over-spend or buy on impulse.

Give it time. It will take a few months to perfect your envelope system. Don’t give up after a month or two if it’s not clicking. You’ll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See….simple!

The bolding is on number 6 is mine…that was the kicker for me. I’ve got 14 years of poor financial discipline to work my way out of – I can’t expect it to be perfect within one week. 

Anyway, I’ve been fiddling around with spreadsheets trying to get this down to a science, and I can see that it’s going to be a little bit of work. Has anyone used Mvelopes? I can’t see spending $8 a month for this when we’re so far in the hole when a few envelopes that we already had in the house will do.

To come this weekend: A fix for my communication impass with the Mrs?

This is Awesome

In my journey to get rid of my lame debt, I’ve run to the web for help. In doing so, I’ve found an entire world of help from these PFBlogs (Personal Finance Blogs). The find of the day is here: http://www.thetaoofmakingmoney.com/2007/01/30/213.html. It’s some sort of “Frugal Carnival” and it’s got a ton of awesome tips. I’ll be honest, I won’t be using all the tips, but there’s certainly a bunch that I will be using. Thanks golbguru for the tips!

Pleasant Surprise

I’d be lying if I told you that I wasn’t thrilled to see my paycheck deposited into the account a day early. Now’s the time to start using the budgeting ideas and principles that I’ve been studying the last week since the bomb was dropped. Here’s the breakout:

We still had $135 left over from the prior paycheck (from when I took over a week ago.)

• Deposit: $2,890
• First Mortgage: ($1,492)
• Second Mortgage: ($287)
• Various allowances (mine included) ($125)
• Envelopes for Eyecare, prescription drugs, hair care, car repair, kid’s lunches, misc., kid’s clothes: ($140)
• Gas: ($30)
• Groceries: ($200)
• Tithing: ($331)

After it’s all said and done, we’re left with a little over $400 in the account. That’s a good minimum balance for us to have, so any overages we have after the next paycheck will go the first loan in the debt snowball: my student loan. Why the student loan? I know that there are tax advantages to having that be one of the last ones paid off, but I chose that for a couple of reasons: It’s got a relatively low balance ($1,765) and a pretty high minimum payment ($93). So if I can get rid of that sucker before too long, I’ll have an additional $93 to pay down the next debt: the scooter loan. (More on that later)

I made a list of all these items, recorded them in the register (You Need A Budget), made a copy of it, sent it to my wife so that she could know where we were financially.

Day 2 – Another day older and (not) deeper in debt

Well, it’s now Wednesday 1/31/2007. Payday is two days away. That is significant for a couple of reasons:

1. 1) The change in my deductions, withholdings and the termination of my 401 contribution mean that I should have an additional $320 (plus or minus) in each bank account each payday, and
2. 2) We still have $140 in the checking account. YES – we didn’t overdraft. This required some (not really a lot) of sacrifice. It’s not like we’re eating Ramen every meal…once a day yes, but not every meal. The boys are eating every meal and it’s not a big deal. I’m pretty confident that with some concentration and a little work and sacrifice, that we will be on track to pay this crap off by March 08.

 However, we are suffering on the relationship side of things. I know I’m kind of being a baby about it, but I’m still pissed about being left in the dark for so long about our financial situation. Should I have asked more pointed questions earlier on? Sure, but I did not want to give my wife the impression that I didn’t trust her with the finances. So I go home late every night, I say very little to my wife, and leave for work before the kids get up. She asked me directly today, “Are you ever going to like me again?” in kind of a joking way, but with some concern I’m sure.

Welcome to my hell

Because of some miscommunication between my wife and I, it turns out that I have 20,440 in outstanding, revolving credit. On top of that, I have a student loan of 1,765 and a car loan of 14,986. Add it all up and we’re looking at 37,198 in unnecessary debt. YIKES.

What happened? Good question. Here’s my best guess: My wife quit her job at the end of 2005 and I thought that we were doing okay financially. It wasn’t until last Wednesday that my wife told me that in order to make ends meet she had to take out credit card debt to the tune of 15,000 in order to pay the bills. Woah…what the…I’m guessing that my wife felt a little guilty and somehow felt that we were going to be okay.

 The funny thing is that I’m a CPA and I do okay, but I felt that it was important to have my wife in charge of the finances, and we’ve been fine for 13 years, so I didn’t anticipate a problem. Well, that’s all changed and I’m think that I’ve got a good plan.

When I first found out about this I was absolutely furious…I felt a little betrayed – I almost wish that she told me that she’d been watching porn or having an affair. In some ways that would be preferrable than the hole that we find ourselves in know. I still am having a tough time talking to her about it, or about anything, for that matter. The first 3 nights after she told me I slept on the couch, and only the past couple of nights have I slept in the bed, but there’s certainly no warmth.

I wrote down a list of demands – including:

• I needed statements of all debt outstanding, including rates, balances and minimum payments.
• I needed a detail of all other monthly payments we are required to make (tithing, utilities, etc.)
• I told her that under no circumstances would we be exchanging gifts, going on trips, etc. until at least all the revolving credit was paid off…(I’m not too concerned about the car, but I’m guessing that as soon as I get the ball rolling and pay off the other stuff, it won’t be a stretch to make the rest of the payments.)

I then went into work, changed my withholdings and got rid of my 401 contribution. I know that some out there may disagree with terminating the free match from my employer, but I felt it was important to get the extra 180 a month to improve cash flow and stop the hemmoraging.

I also purchased a budgeting system called “You Need A Budget” (http://www.youneedabudget.com/). Why? I didn’t have the cash to spend on Quicken, and I needed badly a budgeting system. Keeping a check register is easy, I just wanted a budgeting solution. Maybe in the future the reports and added functionality of a Quicken-type of software will be useful, but I just couldn’t justify the cost at this point.

Anyway, I feel better after my online confession. The reason that I’m doing this is so that I can become accountable to someone – even if it’s just the internet and nobody reads this. I do hope that if anyone reads this that they’ll comment on what they’ve done in the past. We are not doing debt consolidation – that is completely out. We’re not going to take out another mortgage on the house…also completely out.

My inspiration for creating a debt diary is this person’s blog: http://www.bloggingawaydebt.com/. Check out her website…she’s way honest and it’s inspiring and refreshing.