Congressional indecision

Working in the payroll software industry during the day has certainly opened my eyes to problems created by our federal elected officials.  Under normal circumstances, Congress decides on a budget for the next year with significant lead time for the president to sign the legislation and the Treasury department (IRS) to issue tax tables based upon that law.  Tax tables, if issued in early November, can be coded, tested and released by software companies well in advance of the next tax year.  Once software companies release these tables, payroll and accounting software providers must update their customers with the new calculations after performing tests of their own.  This entire process can take up to a month.

Now, mix in this year’s congressional indecision.  The federal government’s budget has still not been finalized as of the writing of this post.  Many analysts and representatives are saying nothing will happen until the “lame duck” session following the election in November.  With no tax law available for writing next year’s tax tables, there can be no software coding and testing at the tax table software level or the payroll software provider level.  To add even more complexity to the situation, how is anyone supposed to plan for their tax liability with no rules in place to determine how much liability will exist?

The Treasury Department has three choices:

1. Issue new tables assuming all Bush-era tax cuts will be continued
2. Issue tables assuming all Bush-era tax cuts expire
3. Issue tables similar to this year with small adjustments for inflation

If Treasury and Congress do not follow the same path, any mix of two of these scenarios would cause tax confusion like we have never experienced before.  Think about the Treasury Department assuming tax cuts will continue while Congress lets them all expire.  Not only would there be two releases of withholding rules (expensive!) within a short amount of time, everyone would experience underwithholding.  This would require that everyone re-evaluate their tax position to ensure withholding or estimated payments would be enough to cover liability.

While I normally don’t get political in this blog, this time I’ll make an exception.  Please write or contact your Congressman and make a good case for the urgency of a new budget.  Delaying will cause withholding problems with all taxpayers and prohibit those who wish to plan from making those plans.  Should we withhold on an unpatched AMT, reduced child tax credits, Making Work Pay credit?  Please Congress, let’s get this resolved.

House Hunting

Q. My husband and I are looking to buy our first home.  We are currently renting and that lease is up at the end of May.  Our credit scores are not terrible but they are not really good either.  We have been looking at buying a HUD home and really have no money to put down on a house purchase.  What can we do?

A. These are very good questions.  The biggest red flag I see from your question is your lack of funds for a down payment.  If you can’t afford a simple 3% down, how will you manage the added expenses that come with maintaining a home?  Think about what is NOT included when you own the home:

1. Taxes
2. Homeowner’s insurance
3. Mortgage insurance
4. Maintenance
5. Appliances and furnishings

The last two items are normally the most expensive.  If you are not a “handy” person and can perform a lot of normal maintenance yourself (I am included in this category), then you will need to pay contractors to bring the home up to a livable condition first.  Keep in mind that HUD homes are foreclosed homes that were insured by FHA loans.  FHA loans are normally for first time home buyers.  During the last2 or 3 years, many home owners in this program suddenly found themselves unable to keep up with payments on their homes, let alone keep up the homes themselves.  For that reason, many of these houses are not well maintained. More about HUD homes here.

Before anyone launches into the home buying process, it is important to understand what you can afford.  This will involve two  steps.  First, you need a personal budget.  What are you spending your money on now?  How much of your cash is spent on home-related purchases while you are renting?  Are there any “leaks”, which is my term for money that could be more efficiently spent?  Once you have followed this path for a couple months, you will be ready to determine the amount that you can comfortably spend in housing.  Your situation is complicated by the quick lease termination.  In this housing market, there are plenty of homes available that are sitting empty with great rates waiting for you.

The second step in the home buying process is pre-qualifying.  You can’t buy a home if you don’t know how much you can borrow.  Your circumstances affect this pre-qualification number. Do you have good credit? Do you have new outstanding loans?  Does your outstanding credit limit your ability to repay a mortgage loan?  As you can see, it is better if you can get your house in order (no pun intended) before looking to buy a house.  There was a very good article recently on CNNMoney.com about steps to take before going after a home.  The better financial position you can get before applying for that loan, the better interest rate you will qualify for.  This directly affects your payment.

Get started on that budget.  I wrote an article about the process a couple years ago.  It should help you get started.

A Budget? Oh No!!!

There’s an interesting article today in the American Express Open Small Business section entitled “Creating Your First Small Business Budget.”

The basic tenet is that most small business owners are not financial gurus.  They are experts in whatever industry the business operates.  However, without being able to plan for income and expenditures for the year, there is no way to know how the company is doing.  Is a particular product eating up excessive amounts of cash?  Are your payroll expenses too high in relation to total expenses?

I encourage you to click the link above and read the actual article.  Here are the main points.

• First, the purpose of a budget is to simply consider carefully how you’re spending your money
• Second, a budget plots your financial path to where you want to be
• Third, don’t get bogged down in formality.  One of my colleagues stresses that budgeting uses a very specific technique called guessing.  He uses a crystal ball that is almost always wrong.  Budgeting needs to be a close as you can get, but it will be wrong.
• Fourth, remember that this is a living document.  Things change during the year.  Unexpected expenses arise.  Proper budgeting will have built in extra funds to handle large surprises.
• Finally, seek some help if you’re feeling overwhelmed by all of this. Find yourself one of those financial gurus to help you walk through the process.

The link to the article is here. It’s still early in the year, now is the perfect time to begin this exercise.

I Don’t Need No Stinkin’ Budget

Q. I’m a small business owner on the East Coast.  I’m trying to make sure I’m spending my company’s money right.  We are expanding and I want to avoid laying off the new employees that are coming on board now.  Any tips?

A. To answer your question in detail, it would take up more space than a normal college textbook.  However, because you focused on spending, this edition is going to cover budgeting. These concepts can be applied to personal financial situations as well.

First, you need to be able to get a rough forecast of your income.  That is the driving force behind any budget.  Look at your bank statements for a good starting point.  Bank statements are like a cash-basis financial statement.  You can see income and outgo all in one place.  This gives you a good starting point as you try to identify months where you have more can than average that you can use on months that do not have as much inflow.

Next you need to have a good expense identification plan in place.  Do you use financial software like QuickBooks, Peachtree Accounting or Microsoft Small Business Accounting?  By entering and categorizing every expense, you can begin to see where you spend your money.  Are you seeing increases in inventory costs or benefit costs or supplies?  What about employee salaries?  Are you budgeting enough to handle raises for those who have provided you with the labor needed to run the business effectively.  Without records, you must make an educated guess as to the amount of these expenses.  Over time, you will again see trends and be able to determine where the “fat” is in your organization.

To make an initial educated guess, you should be searching in industry trade publications for expense estimates.   For instance,  service organizations will spend more of there income on salaries and benefits.  Manufacturing and retail would be spending more on inventory and cost of goods to produce a sellable product.

As a small business owner, you may also wish to join up with your local chapter of the NFIB, National Federation of Independent Business.  They have great resources to get owners educated on the issues in business.  They also lobby Washington on behalf of small businesses.  The US Small Business Administration is another good resource for those running smaller businesses.  They provide links to discussion on the many areas that small business owners need to keep in mind.

Debt and Taxes – part 2

In this second installment of the personal financial freedom series, I will discuss budgeting.  To most people, a budget is how much money they have left to spend until the next check.  This is dangerous and keeps families and individuals from finding areas where they may be wasting their hard-earned cash.

Why budget?  If you admit Read more »

Debt and Taxes – Part 1

I did not get a question on this one, however, the subject seems to be appropriate given the falling sky scenario presented by the media these days.  What is a person supposed to do to be financially prepared for unknown future events?  In my opinion, Read more »