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2012

Missing from discussions about the so-called fiscal cliff is the option to continue the payroll tax cut. To boost the economy, President Obama and Congress introduced a stimulus bill in 2010 that reduced the payroll tax, money collected at the time of each paycheck from employers and employees (workers with W2 forms).

The employee’s share of the tax has normally been 6.2 percent with a built-in ceiling. The ceiling ensures that those earning $110,100 or less pay the full amount of the tax, but those earning more pay no more tax than those earning the maximum, lowering their effective payroll tax rate. Earn $1 million as a W2 employee, and you pay only 0.07% towards the payroll tax.

The payroll tax funds Social Security. Watching the government can be interesting. As we observed while the country was beginning to dip into the recession, political rhetoric moves quickly from finding ways of boosting Social Security to adopting a tax cut which could accelerate the supposed demise of this government program. Once the idea of a stimulus today became more important than preparing for tomorrow’s realities, the conversation focused on reducing the payroll tax.

The stimulus bill reduced the employee’s portion of the payroll tax two percentage points, from 6.2 percent to 4.2 percent, and that change has been extended several times. The payroll tax cut is set to expire tomorrow, January 1, 2013, and neither the President nor the Congress has discussed extended this particular tax cut. Your first paycheck in 2013 will reflect the higher payroll tax rate, reducing your net take-home pay.

Regardless of whether income tax rates remain low or are returned to their levels before President Bush oversaw his round of income tax cuts, net pay will be lower in 2013 than it was in 2012. In general, with all other things being equal (which they never are), someone earning $50,000 will see $83 less each month.

There’s still time. Congress could decide at a later date to reinstate the payroll tax cut. It could take effect retroactively, which mean the government will take less from each paycheck going forward to reach the desired rate by the end of the year. Or the government could reduce the rate in the middle of 2013 without any concern for what has already been paid by employees. Either way, an extension of the payroll tax cut seems unlikely to me because it hasn’t been discussed in fiscal cliff negotiations thus far.

Employees should start planning today for the reduction in take-home pay. In this article, I’ll assume that net income will be reduced by $100 per month. That’s going to be a high estimate for most people affected by the return to the higher payroll tax rate, but it is a nice round number. If you plan for the worst, you’ll be pleasantly surprised when you end up with a more favorable cash flow.

Reduce your spending by $100 per month

If you already have a well-defined monthly spending budget, find an area where you can shave $100. Resist the urge to save less. Don’t sacrifice your savings and don’t reduce your contributions to retirement due to the payroll tax cut. Find the difference in spending rather than saving.

  • It may be time to drop Showtime or HBO, particularly if you signed up during a promotional period and are now paying full price to your cable company. Dropping some services might trigger a new deal that could save you money.
  • Re-evaluate your mobile phone plan, particularly if you’ve expanded your service to include data for tablets over the past few years.
  • How much money are you spending on clothing, particularly if you have children? If you’ve felt the economy improve over the last few years — and not everyone has — you may be spending more than you did in 2008 for expenses like these.
  • Note that gas prices have been declining. If you drive often, such as having a daily commute to work, you’ve probably seen your expenses drop already.

If you don’t have a budget and you don’t track your spending, you might not be aware of your opportunities for spending more efficiently. Start tracking where your money goes so you can better identify the possibilities for reducing your spending by $100.

Increase your non-payroll income by $250 per month

It sounds like employees are burdened by payroll tax, but self-employed individuals deal with it more. When you’re self-employed, you need to pay the employee’s share of the tax as well as the employer’s share. Self-employment income can come in different forms. You may be working for yourself in your own business, or you may be working as a consultant. If you’re issued a 1099-MISC tax form, you’re considered self-employed. If you own your own business, regardless of whether you issue yourself a W2, 1099 or no tax form, the full amount of the payroll tax ultimately comes out of your pocket.

Because of the additional tax burden on the self-employed, aim to increase your income by $250.

  • How would you feel about earning money from one of your hobbies? If you enjoy photography and have proven yourself to be more skilled than the thousands of kids who use their mobile phones as cameras, use automated effects filters, and share their “art” on Facebook, consider doing a family portrait session each month.
  • In the frenetic race to create ever-increasing content online, writers are in demand. Consider offering your skills as a freelance writer for one of a vast number of websites willing to hire good copywriters.
  • If you are not legally restricted, take what you do for a living and offer it to others for a fee. If you’re an in-house accountant, offer to handle your friends’ tax returns. That’s seasonal work, but it could provide enough self-employment income to cover the payroll tax increase for the entire year. If you do office work, find an opportunity to freelance data entry.

I’ve seen that those who begin to focus more on earning income by taking the initiative to make themselves available for freelance or consultant work based on their skills and passions start to see more opportunities. This is more than just earning an additional $250 each month. This could open doors to shaping an entirely new life in terms of income opportunities.

The elimination of the payroll tax cut is just one of those realities, a large-scale economic shift that everyone needs to deal with on an individual basis. We’d like to think we can keep all taxes low forever, but the society in which we would like to live requires funding. Low tax rates won’t remain, and in this case, the payroll tax cut was implemented as temporary from the start, like the Bush-era income tax cuts.

It’s up to the individual to prepare for the changes. When that means less coming home in the form of pay, the changes have to come from spending or income in order to leave saving unaffected. How will you prepare for the elimination of the payroll tax cut?

Photo: Flickr

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A few years ago, credit scores were taboo. The idea that a
credit score could be used for more than just determining qualification for a loan was at best unfair and at worst discriminatory. Employers in some circumstances can use credit scores or credit reports to determine whether to offer jobs to applicants. If you sign a credit authorization form, which some employers might imply or outright say is necessary to be considered, the company can use your credit against you.

Auto insurance companies can use credit scores to set your rate because they’ve found that there is a correlation between higher scores and safe driving. If you intend on renting an apartment, the landlord can choose to perform a background check, and credit history could be included. If there are red flags on your report, such as a history of being unable to pay rent, you could be denied the lease.

It’s clear that good credit is becoming more important in life. Credit scores and the quality of your credit histories determines not only the price of major borrowing needs, but whether you can live where you want, whether you can get the job you want, and the cost of required insurance. It’s no longer a mystery that companies evaluate the quality of an individual using their credit, and as a result, any one person might benefit from adding the credit score to their own list of filters for dealing with other people.

It’s getting harder to live a life without a credit score. It’s a noble goal to exist in modern society without taking on any debt and to try to stay off the credit grid. The need for credit permeates life now more than ever. It’s still possible to buy a house with cash, rent an apartment without a credit history, get a job with an employer who doesn’t perform a background check that includes a credit inquiry, or buy insurance without a credit score. But if you haven’t built up a credit history, it’s just another obstacle standing in your way, and can end up costing you more money.

People with poor credit histories, low scores, or no scores might be starting to find it more difficult to find long-lasting love. According to the New York Times, more people are adding credit scores to their social filters, as mentioned above. Credit quality has, in some cases, become the subject of first dates. It’s no surprise that a couple benefits in the long run when both members of the pair have solid approaches towards their finances. Money problems often come to light late in relationships, sometimes when couples are already married and beginning to combine their finances for the first time.

Asking about a credit score on the first date and using the credit score as a proxy for the quality of an attitude towards money and responsibility is one way to prevent reaching the point where the relationship has progressed too far. On one hand, discovering late that your partner does not share your responsible approach to money creates a challenge, that if overcome, could strengthen the relationship.

Then again, disagreements like these often represent a larger issue or disagreement about responsibility that might not easily be overcome. Using the credit score as part of early criteria would help prevent wasted time and effort on a relationship that might never work out. What’s my credit score.

With a responsible approach to handling personal finances, one should be able to expect that a partner has the same. There is room for different philosophies. Someone who identifies himself as a “saver” could have a positive, healthy, long-term relationship with someone who identifies herself as a “spender.” In some situations, one person’s strengths may complement another person weaknesses. If the underlying goals and philosophies are too disparate, it might cause tension and eventually dissolution.

The credit score is just one clue. A good credit score says someone has not made any grave financial missteps, while a bad credit score, by itself, is a little more ambiguous. It could mean someone has a record of bad financial habits. It could mean they’ve missed paying rent. It could mean they have more credit card debt than they can handle. But it could also mean they trusted a family member when co-signing a loan. There’s even the possibility that a family member used and destroyed their credit without their knowledge, and they were unable to work with the credit reporting agencies to change the report.

Your FICO score, or any one of the various numbers published and sold by credit reporting agencies, doesn’t contain any detail. That’s why background checks often contain more than just a credit score. Along those same lines, if you plan on discussing your financial situation with a potential future spouse, you might want to go deeper than the superficial number. It doesn’t make sense to waste time with someone with whom you won’t be compatible, but a credit score alone isn’t going to provide enough information to judge your financial compatibility.

While it might be more common to ask about your date’s financial situation at your first dinner, and I certainly understand why some would not want to waste any time beyond a first date in the search for a match in love, I tend to think it’s best to leave the discussion about finances until a later date, unless the situation calls for it specifically. Personally, I wouldn’t take a first date to a real estate investing sales pitch, but if there’s any time it’s appropriate to ask someone you just met about their credit score, that might be it.

Your credit score is shorthand, and people may judge you incorrectly based on your score, whether it’s low or it’s high. There’s often a story to tell, and while it might be an entertaining story for a first date, you might want to find other areas in which you’re incompatible before releasing a love interest from your life due to his score of 650 compared to your 790.

If you’re the one who feels the need to improve your credit score to make yourself more appealing to the pool of available partners with increasing demands, here are some tips for increasing and improving your credit score. You can check your credit score here.

New York Times

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In January, Consumerism Commentary will begin the Naked With Cash event and series. Several Consumerism Commentary readers will share their financial reports and analyses at the beginning of each month, with insight from financial planners and other experts. To introduce each of the participants to readers, I asked them to share where they’ve been, where they are, and where they’re going, and to describe their strengths, weaknesses, opportunities and threats.

Meet Naked With Cash participant Calvin. He has provided the following introduction.

Hi Everyone, I would like to introduce myself as Calvin. That’s not my real name, but one that I think suits me because of the amount of mischief that seems to follow me around in life.

I am in my early 40’s and grew up in a large blue collar family in suburban New Jersey. My Father was a strong believer in civil service and encouraged all of the kids to pursue that route in life. I did work in civil service for about 10 years after high school as an electrician before finishing my undergraduate degree in IT and moving to a white collar work environment in the late 90’s. I have worked for the same large, multi-national corporation since 1999 and am currently an IT project manager for a global IT project.

My employment seems to be fairly secure for the next few years at least, as we continue to roll our project out to various countries around the world. My base salary is about $120,000 annually and I also receive a bonus which is usually 10-15% of my annual salary. I also have a 401(k). My company matches 66% of my contributions up to 6% so if I contribute 6% of my salary my company will match with 4% of my salary.

My company still maintains a fully company funded pension plan and in addition I occasionally receive long term incentives in the form of stock options or restricted stock units (RSUs). These have not historically proven to be very valuable but I have been able to cash in for an extra few thousand the last couple of years. I do retain hope that at some point my company’s stock may rise again and these may provide a healthy financial return.

I was married for 17 years and had a painful two-plus year separation and have just recently finalized my divorce. I have a teenage child who has some ongoing medical issues which add additional emotional and financial strain to a very stressful life situation. While money problems did not play a direct role in the reasons for my separation and divorce, my wife and I did a terrible job of managing our money while we were married, and our lack of savings made separation and divorce additionally painful.

Prior to my divorce my wife and were never very good at managing money. She basically took no interest in any discussion involving money matters, and I did the best I could managing the finances on my own. That meant that we lived above our means for our entire marriage. From the outside, everything looked fantastic. We had a large house in a rural town with Blue Ribbon Schools and a regular cleaning lady to keep it neat and tidy. We had a large piece of property which we paid a landscaper to maintain. We provided our child with all kinds of private lessons, had a built-in pool, three cars in the driveway, regular vacations, a big flat screen TV, a full complement of electronic gadgets, and lots of debt to keep everything afloat.

I never made really bad financial decisions, while we did take equity from our house from time to time to pay down credit cards, we never borrowed more then 80% of our home’s value and never went for any kind of exotic and irresponsible mortgage products. I used to say that I never worried about money because anytime I ever needed it, it never failed to show up in my life. When my marriage failed we happened to be caught in a perfect storm of financial problems. My wife had been unemployed for almost 2 years and her unemployment benefits were going to run out shortly, our house was underwater by about 25% of its value and we were maybe just barely making ends meet on all of our financial obligations.

I think that my financial strength is that I have very good earning power. I have valuable IT skills which remain in high demand, especially in the part of the country where I live. I have gone on to receive an MBA from a good school and am always taking training to keep my skill set fresh. I have a very good employer who still believes that there is value in employee loyalty and as a result provides an excellent work environment, fair wages and what I would consider above-average benefits.

I would also say that I have a fair bit of inherent financial knowledge. Because of my career I am very good at crunching numbers and understanding the details of financial products and services. In the past my financial weakness has been primarily living above my means. Until my divorce I was always looking for the next gadget or trip or vehicle that was going to make me happy, and I never let something as silly as whether I could really afford it factor into my decisions. Unfortunately for me, it took a major life crisis — divorce — for me to come to appreciate the value of savings and the safety and security that it brings. Although in my current situation I am still living paycheck-to-paycheck and have not been able to put aside any savings, I anticipate in the next few years as my debt gets paid off and my divorce obligations begin to subside, I should be able to put together a safe and effective financial plan.

I have been reading Consumerism Commentary for the past three years, and although I don’t comment or participate in the community, I would say that I read on average 60% to 70% of the postings. For fun I like to spend time with my child, with whom I have 50% custody, and my dog. I also play guitar (poorly) and am very interested in physical health and wellness topics like nutrition, exercise, and emotional and spiritual health such as prayer and meditation. I would like to one day be able to use my passion to teach and share what I have learned about health and wellness with others.

Thanks for continuing to read Consumerism Commentary, and welcome to Naked With Cash, Calvin!

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In January, Consumerism Commentary will begin the Naked With Cash event and series. Several Consumerism Commentary readers will share their financial reports and analyses at the beginning of each month, with insight from financial planners and other experts. To introduce each of the participants to readers, I asked them to share where they’ve been, where they are, and where they’re going, and to describe their strengths, weaknesses, opportunities and threats.

Meet Naked With Cash participant SteveDH, the only participant in retirement. Here is his introduction.

I entered the Air Force at 18 after high school in North Miami with $25 in my pocket and $1,934 in the bank. During the 20 years I served in the military I got married, begot (neat word) two kids, completed a Bachelor of Arts degree in Business from Park University, and lived in Mississippi, Thailand, Nevada, Germany, New Mexico, Florida, Korea, Idaho, and Virginia, finally settling in Missouri.

The settling in Missouri was in 1985 when I retired from the Air Force and went to work for a well-established company. I worked another 22 years and retired at the end of 2007 at 60 years old. My retirement asset target was $500,000 and I achieved that by the time I retired, but the strength of my retirement finances lie in pension income rather than asset consumption.

Presently retired, my wife and I enjoy traveling in the form of road trips and cruises. Our kids are grown, have their own homes and have become quite successful. From a financial standpoint I’ve tried very hard to simplify both the recording and reporting aspects of our finances. I use Quicken and Excel but I still budget and focus on cash flow. In the short-term future my wife and I want to continue our travels, volunteer when we can lend a hand, and stay close to all of our family. Long-term we will attempt to maintain our health, accomplish whatever our tired old bodies will allow and try to ensure our resources will last as long as we do.

My investment strategy as discussed between me and my CFP is “conservative income.” When we get cranked up it’s preserve assets, reduce risk exposure, preserve assets, don’t blow it, preserve
assets, hang-in there and preserve assets! My first year of retirement was 2008 -– think about that!

My Investment allocation target is 50% bonds, 30% cash and 20% equities, and that’s what we maintain. For the last three years I’ve been converting traditional IRA assets to Woth IRA assets in order to avoid increased taxes when I have to take distributions. It’s the old “Pay me now or pay me more later” Fram commercials applied to tax brackets and RMD.

In the first five years of retirement the only dollars that exited our retirement accounts went to Obama in order to pay the taxes on the dollars we converted from my traditional to my Roth IRA.

All credit cards bills are paid in full monthly and we have no debt.

These are my major financial rules:

  • Live below your means.
  • Manage your big S. (Be careful how you say that. The S is Spending.)
  • Simplify your life and your finances. Keep it simple, senior!
  • The income statement rules!

Thanks for your continued reading, SteveDH! I look forward to seeing you participate in Naked With Cash.

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Naked With Cash: LastDollar

by Luke Landes

In January, Consumerism Commentary will begin the Naked With Cash event and series. Several Consumerism Commentary readers will share their financial reports and analyses at the beginning of each month, with insight from financial planners and other experts. To introduce each of the participants to readers, I asked them to share where they’ve been, where […]

7 comments Read the full article →

Naked With Cash: JW

by Luke Landes

In January, Consumerism Commentary will begin the Naked With Cash event and series. Several Consumerism Commentary readers will share their financial reports and analyses at the beginning of each month, with insight from financial planners and other experts. To introduce each of the participants to readers, I asked them to share where they’ve been, where […]

15 comments Read the full article →

Naked With Cash: Kathleen

by Luke Landes

In January, Consumerism Commentary will begin the Naked With Cash event and series. Several Consumerism Commentary readers will share their financial reports and analyses at the beginning of each month, with insight from financial planners and other experts. To introduce each of the participants to readers, I asked them to share where they’ve been, where […]

8 comments Read the full article →

Naked With Cash: Anonymous S

by Luke Landes

In January, Consumerism Commentary will begin the Naked With Cash event and series. Several Consumerism Commentary readers will share their financial reports and analyses at the beginning of each month, with insight from financial planners and other experts. To introduce each of the participants to readers, I asked them to share where they’ve been, where […]

4 comments Read the full article →

What Is Your Biggest Financial Concern Today?

by Luke Landes

I am preparing for a possible media appearance on a program broadcast across the world. I’ve been reading a number of news stories as well as comments from readers in order to get a sense of what Americans are concerned about today. One of the biggest issues seems to be the so-called fiscal cliff. I’ve […]

11 comments Read the full article →

Naked With Cash: Anne and Matt

by Luke Landes

In January, Consumerism Commentary will begin the Naked With Cash event and series. Several Consumerism Commentary readers will share their financial reports and analyses at the beginning of each month, with insight from financial planners and other experts. To introduce each of the participants to readers, I asked them to share where they’ve been, where […]

4 comments Read the full article →
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