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Published: Wednesday, February 07, 2018 @ 6:30 AM
If you’re trying to get out of credit card debt, managing your money the old-fashioned way is what money expert Clark Howard has been recommending for years.
We’ve all read the studies that say people spend more when they pay with plastic instead of cash. Is that really true?
I decided to test out a cash-only budget for an entire month using the envelope method, but I’ve made a few simple tweaks to make the system easier to follow in a digital world.
Let me be clear: There’s nothing wrong with the old-fashioned way! I just wanted to make it more practical.
For years, I’ve put nearly all of my expenses on credit cards for the rewards (groceries, restaurants, clothing, gas) and pay off the balance monthly, so switching to cash has been an adjustment.
Here’s the 7-step plan I’m following to make budgeting with cash work in 2018:
The first thing I did was freeze all but one of my credit cards to limit the temptation to use them! I put the cards in a Ziploc bag, submerged the bag in a bowl of water and stuck it in the freezer.
If this seems a bit too extreme, stash the cards somewhere else — just don’t leave them in your wallet!
Next, make a list of where your money is going. I use two online budgeting tools to track my spending (Mint and Personal Capital), so all I had to do was log in to see a list of my major expenses.
Don’t worry about separating fixed and variable expenses for this step. Just jot down your budget categories!
Now that you have a list of your budget categories, you want to identify the ones where you think you have the most room for improvement. What are you wasting money on?
For this challenge, I narrowed it down to just three variable spending categories that I’ll be managing with cash:
I left out transportation because I don’t overspend on gas and paying with a card is much more convenient.
The crossed-out expenses represent budget categories that I’m already doing a pretty good job of managing, and I put stars next to expenses that I may want to focus on in the future.
Fixed expenses like mortgage/rent, utilities and insurance policies can stay on autopay — don’t touch those!
Here are the envelopes for those three categories. I set a budget for each of them and went to the bank to get the cash, which my goal is to make last for two weeks.
Some people fill up their envelopes every week or every payday — it’s entirely up to you.
I wrote down the deposit amount on the back of each envelope, and I keep track of my spending using a note-taking app and the calculator on my smartphone.
You may prefer the low-tech way of listing your transactions on the back of the envelopes.
How do you shop online with a cash budget? Let me explain the workaround that I’ve been using.
In addition to my three envelopes filled with cash (food, clothing, miscellaneous), I have an envelope that says “Online” — but this one doesn’t start with any money in it.
For online purchases, I’ve decided to continue using the one credit card that I didn’t put in the freezer.
Immediately after shopping online, I take money from one of the cash envelopes and transfer it to the envelope for online spending so that I hold myself accountable for that purchase.
You can then take the money from the “Online” envelope to your bank or use it to fund the other envelopes when it’s time to fill them back up.
Don’t like this idea? Some people will instead use prepaid cards or gift cards to shop online while on a cash budget.
I don’t carry these envelopes full of cash everywhere I go. That just doesn’t seem safe. Before I make a trip to the store, I take out the money I’m going to need and leave the rest at home.
I’ve been storing the envelopes in a small container along with my receipts for the two-week period.
Update: There are no coins in these envelopes! I’m rounding up purchases to the nearest dollar to keep things simple. Loose change goes into a separate piggy bank.
What happens if you forgot to take money out of your food envelope before heading to the grocery store? Turning the car around may not be the most realistic thing to do!
That’s why I keep $20 cash in my wallet no matter what, plus my credit card and debit card — only for the ATM.
I know that many people on cash budgets will think that’s cheating, but I disagree. I still use the card, which I pay off monthly, for the categories that aren’t part of my cash-only budget.
And if I end up using any of the “Forgot my envelope” money, I can replenish it as soon as I get home.
I used this cash budgeting system for the past six weeks, refilling the envelopes every other week. I had $95 left in my envelopes after the first two weeks, $125 left after the second two weeks and $35 left after the third two weeks — $255 total.
Having to count out bills and hand them to a cashier really does make you think twice about impulse buys!
A few people on Clark’s Facebook page have said they’re reluctant to try this method because they’ll miss out on credit card rewards, but I’m not worried about that because I’m saving so much money.
If budgeting with cash reduces my spending by 10%, I’ll gladly give up the 2% cash back from my credit card company.
Published: Monday, February 19, 2018 @ 3:42 PM
— Not every fraud artist is a sketchy identity thief or faux Nigerian prince from the dark corners of the internet. You might end up committing fraud entirely by accident if you don’t pay careful attention this tax season.
Individual slip-ups usually result from negligence rather than ill intent, but even white lies fall into the latter category. The IRS is serious about nipping fraud in the bud — for 2017, it added 37 new steps to its authentication process to safeguard against it. For you, that means 37 new reasons to check and double-check your return before filing your taxes — plus seven more from GOBankingRates. Get the deductions and credits you’re entitled to, but make sure you do it legally. So that you don’t accidentally commit tax fraud, check out these seven common mistakes to avoid when filing taxes.
1. Filing a return with missing or incorrect information
It’s crucial to file complete and accurate tax returns — or you might be committing tax fraud. For example, if you paid thousands of dollars to attend college this year, you might be eligible to claim an education tax credit to reduce your taxes.
If you claim an education credit, however, don’t forget to include Form 8863 — for education credits — with your return. Forgetting to include vital data like your Social Security number — or entering it incorrectly — also can create headaches.
How to avoid it: Professional tax preparers or tax preparation software can come in handy. Often, tax software with built-in e-filing won’t let you submit your forms unless all your necessary data is included.
Potential penalty: Typically, if you forget or make a mistake on your return information you’ll experience delayed processing of your tax return. Keep in mind that omissions prompt the IRS to take a closer look at your forms — and maybe even target you for tax fraud. If omitted data changes your status from owing money to getting a refund — or even just makes your refund higher — your mistake could be interpreted as willful failure to supply information, which comes with penalties of up to a year in prison, $100,000 in fines or both.
2. Incorrectly claiming the earned income tax credit
Claiming the earned income tax credit when you’re not eligible for it is a major audit trigger. If you qualify for the credit, which is designed to offset the burden of Social Security taxes for low-to-moderate earners, you can get credited up to $6,318 — but you must meet specific requirements. When filing your 2017 taxes, the EITC income limits range from $15,010 to $53,930, depending on your marital status and number of qualifying children.
How to avoid it: Don’t file for the EITC if you have investment income exceeding $3,450. Child support, alimony, welfare compensation and workers’ compensation benefits do not contribute toward earned income. Your eligibility might fluctuate from year to year, so read the requirements closely each tax season.
Potential penalty: This issue could result in a delay, denial or required payback of your EITC refund — and possibly a ban from claiming the EITC for anywhere from two to 10 years.
3. Abusing tax shelters
Chances are, a tax shelter that sounds too good to be true likely is. Often, accountants and wealth planners tempt taxpayers with vague or deceptive tax shelter “opportunities,” or offer “captive” insurance structures that are at odds with your company’s genuine needs, duplicate your existing coverage or provide coverage for totally implausible events. Your barbershop in Indiana probably isn’t going to get attacked by tigers, so don’t use that excuse as a tax shelter.
How to avoid it: If you’re in over your head on tax shelters, seek out an independent opinion. Be especially wary of ambiguous micro-captive insurance tax shelters, which have been highlighted for the past three years on the IRS’s annual “Dirty Dozen” list of tax scams.
Potential penalty: “These scams can end up costing taxpayers more in penalties, back taxes and interest than they saved in the first place,” said IRS Commissioner John Koskinen. In addition, the IRS can count this as tax avoidance or evasion, which might net you fines of up to $250,000 and jail time of up to five years.
4. Claiming the wrong deductions
If you think it’s clever to take the family along on a business trip just to deduct the vacation as a business expense, think again. When April rolls around, forget about claiming your family’s side trip to Disneyland.
Some commonly misused deductions — likes writing off groceries that you didn’t explicitly buy for clients or employees — are just plain mistakes. But if you knowingly make false statements on your return, expect trouble.
How to avoid it: Again, tax prep software helps prevent errors — it typically shows the deductions for which you qualify. If you’re going “old school,” explore the IRS website, which offers tips for deducting business expenses and full breakdowns of what you can legally deduct. Key IRS documents like publications 535, 334 and 538 detail eligible business expenses and offer tax guides for small businesses.
Potential penalty: If you’re guilty of fraudulent activity or false statements, you could be looking at some combination of imprisonment of up to three years and fines of up to $250,000.
5. Taking inflated deductions
Your chances of being audited are lower than ever: This is the sixth straight year during which numbers have dropped and in 2016, only 1 million Americans were audited, according to CNBC. That might make it tempting to claim your whole basement as a home office deduction, but don’t.
Even if the chances of getting caught are low, inflated deductions are still illegal. “You don’t want to roll the roulette wheel and have the little white ball land on your number,” said Koskinen.
How to avoid it: Don’t stretch the truth. If you think you’ll have trouble paying what you owe all at once, work out a payment plan or installment agreement with the IRS via its Online Payment Agreement Tool or Form 9456.
Potential penalty: For an incorrect filing like this, the IRS can hit you with a $5,000 fine, a fee of 20 percent of the disallowed amount or a penalty in the amount of 75 percent of the full income tax you owe. You might even face an IRS criminal investigation.
6. Failing to report income
It’s easy to not claim all your tips — in fact, the IRS estimates up to 40 percent of tips go unreported. But don’t get too comfy — failing to report your income to the Internal Revenue Service might count as tax evasion or failure to supply information.
How to avoid it: If you’re a server, keep a daily record of all tips you receive and use Publication 531 to report your tip income. Whether you’re a server or not, don’t fall victim to common misconceptions — use the most recent version of Publication 525 to keep track of what the IRS considers taxable and nontaxable income.
Potential penalty: For not reporting tips, you’re subject to a penalty equal to 50 percent of the Social Security, Medicare, Medicare or Railroad Retirement taxes you owe on unreported tips. Regardless of your industry, tax evasion penalties can cost you up to five years in prison and up to $250,000 in cash.
7. Falling victim to tax preparer fraud
“Choose your return preparer carefully because you entrust them with your private financial information that needs to be protected,” said Koskinen. About 60 percent of U.S. taxpayers use tax professionals to prep their returns — and the vast majority of those pros are honest, according to the IRS. It’s possible, however, that the preparer you rely on might dupe you into claiming credits or deductions you’re not entitled to in order to increase his own fee.
How to avoid it: When choosing a tax preparer, always confirm his IRS Preparer Tax Identification Number and professional credentials via the online IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
Published: Wednesday, December 13, 2017 @ 10:32 AM
— It's that time of year again when parents and college or college-bound students fill out the FAFSA (Free Application for Federal Student Aid).
The idea of wading through a form – especially one that requires financial information – is definitely not an appealing idea, but the FAFSA could be a tremendous help in getting your student money to attend college.
The following points are what you need to know, as well as common mistakes to avoid when filling out the FAFSA.
Fill it out – you have nothing to lose.
You may think that you don't need to fill out the FAFSA, especially if you believe you might not qualify for need-based aid. But there's no income cut-off point with federal student aid, according to the U.S. Department of Education. In addition, the FAFSA can help you qualify for all kinds of grants, loans and scholarships, including those offered by your state, school or private organizations.
By investing a few minutes of time, you could reap thousands of dollars in potential rewards.
Submit it ASAP.
The sooner you submit your FAFSA, the better, according to consumer adviser Clark Howard. Although the federal deadline isn't until June 30, 2018, you should check with the financial aid administrator at colleges you're interested in to make sure their deadlines aren't earlier.
Submitting earlier will help you plan how you'll pay for college. You'll also have a better chance of getting as much aid or scholarship money as possible since some colleges distribute their available money on a first-come, first-serve basis, Howard says.
Gather the information you'll need.
The FAFSA asks questions about the student as well as his or her parents if the student is a dependent.
You'll need the following information on hand as you fill out the FAFSA:
Watch out for common mistakes.
The National Association of Student Financial Aid Administrators points out some common mistakes that can delay your form's submission or cause you to not get the aid and scholarships you might qualify for. They include the following:
Keep an eye out for requests for more information.
Your FAFSA may be selected for verification, which means you'll have to provide some additional or supporting information, U.S. News & World Report explains. This process doesn't necessarily mean you've done anything wrong. You may have a discrepancy or mistake on your form, but some FAFSAs are just randomly selected for verification (lucky you!).
Published: Wednesday, November 22, 2017 @ 12:01 PM
— With the recent massive security breach of Equifax — one of the three credit bureaus with which many may have thought their private information was safer than most — now many people are dealing with more insecurities, wondering where they can entrust their private information, if anywhere.
Here are some options:
Better and cheaper than credit monitoring, an option for optimal security is freezing your credit through each of the three credit bureaus (Experian, Equifax and TransUnion), according to WSB money expert Clark Howard at Clark.com.
The fee is $3 to $10 per person per bureau, depending on your state, to allow you to seal your credit reports — except now it's free with Equifax from here on out due to the recent data breach.
You will be provided with a personal identification number (PIN) that only you know and can be used to temporarily unfreeze (or "thaw") your credit when legitimate applications for credit and services need to be processed such as when you are buying a car.
This added layer of security means thieves can't establish new credit in your name even if they are able to obtain your personal information.
LifeLock vs. CreditKarma.com
While LifeLock advertises it can help consumers secure their information to guard against identity theft, LifeLock charges monthly services that start at $10 a month.
This kind of credit monitoring is not the same or as effective as a credit freeze, said Craig Johnson for Clark.com.
Instead, he recommends CreditKarma.com for free credit monitoring.
If you haven't already frozen your credit, now would be the time since Equifax recently got hacked and the information of possibly 145.5 million people was attained by these hackers.
Information accessed primarily includes names, social security numbers, birth dates, addresses and, in some instances, driver's license numbers.
To try to compensate, Equifax is offering free identity theft protection and credit file monitoring (but only through Jan. 31, 2018) with its TrustedID Premier.
Another point of confusion is the unsolicited free Dark Web Email Scan offered by Experian to your email, leading to a monthly fee for further scanning.
Experian IdentityWorks also offers a free 30-day trial membership for identity theft protection and resolution, involving a monthly automatic deduction of $9.99 for the plus plan or $19.99 for the premium plan.
It's free to cancel within the 30-day trial period, but the consequences are not revealed up front for those who decide to cancel their membership once the monthly fees begin.
Published: Friday, November 17, 2017 @ 4:17 PM
— Your house is a large expense with many associated costs like a mortgage payment, insurance, maintenance and more.
It provides a roof over your head, of course, but since it usually costs you money each month, why not put it to work for you and earn some cash in the process?
The following are four ways your house can make you money:
List your home with Airbnb or VRBO.
If you're planning to be out of town for a few days or don't mind bunking with a friend, you may be able to make some money by renting out your home through sites like Airbnb and VRBO.
Before jumping in, you'll need to take time to learn about the market, your expenses and any taxes you may need to pay. And before you list your property, you'll need to understand how to make it stand out with a good listing, including compelling photos and competitive pricing. Airbnb has a series of toolkits to help with this.
Rent it out to the area's growing TV and film industry.
When TV, film and commercial producers want to depict a home on screen, many times they'll rent the real thing, according to Money. It can be inconvenient for owners, however, since their homes may be taken over by a large crew and be completely rearranged.
On the other hand, homeowners often have fun with the experience while making some extra money. And while you're watching TV or a movie, you may be able to spot your home.
Host a foreign exchange student or faculty member.
Temporarily hosting a foreign exchange student or faculty member who's studying or teaching in this country can help you make some extra cash for anywhere from six weeks to six months at a time. You'll also be exposed to a different culture and language, and the experience could help you form a bond that lasts even when your guest returns home.
The Penny Hoarder suggests contacting student housing offices at local community colleges and universities, asking to be placed on their list of host families. After this, you'll have to apply, be interviewed, and allow your home to be toured. You'll also need to pass background and reference checks.
Rent out your driveway or storage space.
If you have extra space in your driveway, you may be able to make some money by letting others park there, according to Men's Health. This is especially true if you live near a commuter rail line or sports stadium, but you'll need to check to make sure you're not violating any local ordinances. Check out websites like JustPark to get started.