Todd G. Buchholz, a former White House economist, had a huge spread in the Washington Post’s Outlook section recently about his idea of paying people who have been unemployed for 26 weeks to take jobs instead of continuing to draw unemployment benefits. “Will Work for Signing Bonus” contains a number of interesting ideas, and his math appears to compute, but alas, I don’t think Buchholz realizes just how nasty the job market is today. After being unemployed for half a year most people are considered dead meat to potential employers. No offers are being made. Many of the long-term unemployed aren’t even getting interviews, because people who already have jobs are openly preferred. Next come people who have left jobs within the past month or so. People who have been out of work long-term reside at the bottom of the employment heap.
The crux of the problem is most people are not sufficiently humbled immediately after losing their jobs. They don’t grab at the first thing that offers, and in this economy, likely they ought to. If the new job is a poor fit, the person can continue the job hunt from a position of strength—that of being employed. Unfortunately, most people who lose their jobs are in a state of shock when it happens, and they need time to recover. Time is what they don’t have in our fast-changing society. We have so many safety nets, not only unemployment benefits but also credit cards and spouses with jobs, that many recently laid-off workers aren’t quite desperate enough right after the event. They should be. This is a buyer’s market and employers have their pick. A resume is viewed as fresh for a month or so, but after two to three months, the resume is definitely sour. People who lose their jobs should settle for whatever is offered within the first two months, because there may not be any more offers for a long, long time. If ever. I know it sounds awful, but it’s the practical thing to do unless unemployment benefits happen to pay more than the new job would.
Buchholz wants to pay people bonuses to take a job, but impose an enormous penalty if the person quits or changes jobs in under a year. This presumably is to encourage people not to game the system, as has been done with the first-time homebuyers' credit and various other tax advantages. I think it would be more fair to require the worker to pay back the bonus with interest, raising that interest over time if payback is dilatory. Regardless of the details, Buchholz’s idea of giving unemployed people a financial incentive to take jobs instead of extended unemployment benefits is interesting. If it worked, it would save the government money and add to government coffers as the employed person began paying income taxes again.
Should we all rush out and take whatever jobs we are offered? Yes. If the worst your resume shows is a little job-hopping rather than a lengthy period of unemployment, you have a competitive advantage over other job seekers. And meanwhile, you have a job.
With one caveat. This strategy does not apply to low-level retail employment. The field is not stable enough, and your prospects are not good enough, to give up anything to enter it. In many cases, even working full-time at a big box store will not be enough to pay the rent if you previously held a moderately good office job. Also, I've done plenty of tax returns for people who only lasted for half a day at McDonald's or Home Depot. Firing people from these jobs is dead easy and happens all the time. Many out-of-work people are nagged to go work at these places, but accepting such underemployment is a strategy of last resort, to be taken only after all other avenues have been explored, including using up all unemployment benefits, getting a roommate, and selling possessions.
Saturday, June 25, 2011
Monday, June 13, 2011
How to Get Out of Debt
1. Stop buying on credit.
2. Contact your creditors and push to get your interest rates lowered.
3. Balance transfer your high-interest debt to lower-interest accounts.
4. Pay off your highest-interest debt first.
This simple advice presumes you have income. Maybe not enough income, but there's a paycheck coming in steadily, and that gives you some choices.
Another set of tips to try:
1. Change up your eating habits. Do not buy food at the same places, or the same food. Instead, try to work from a budgeted food amount outward. If you have $100 for food this week, what can that buy you, and how long can that last, and how often must you shop, and is food preparation involved?
2. Sell any vehicle on which you are making payments, and buy a used vehicle outright. It has to be in good condition. You have to be reasonably certain it won't beggar you with repair costs. But a paid-for car is usually cheaper to own and run than a new car.
3. Hold a yard sale (or post on Craigslist, which is free) and sell anything you no longer need or want. It may surprise you how little people are willing to pay for your used goods. They may not buy them at all. A good reminder not to spend so much money on buying all that new stuff in the first place.
4. Empty your clothes closets into your suitcases. What you own doesn't fit? Reduce it until it does, and never buy a piece of clothing again without getting rid of a piece. Be mindful of this when you shop for clothing, because it is easy to think you need multiples when the truth is you don't. If your suitcases are full, you have enough clothes.
Add your own tips for getting out of debt if you've got 'em.
2. Contact your creditors and push to get your interest rates lowered.
3. Balance transfer your high-interest debt to lower-interest accounts.
4. Pay off your highest-interest debt first.
This simple advice presumes you have income. Maybe not enough income, but there's a paycheck coming in steadily, and that gives you some choices.
Another set of tips to try:
1. Change up your eating habits. Do not buy food at the same places, or the same food. Instead, try to work from a budgeted food amount outward. If you have $100 for food this week, what can that buy you, and how long can that last, and how often must you shop, and is food preparation involved?
2. Sell any vehicle on which you are making payments, and buy a used vehicle outright. It has to be in good condition. You have to be reasonably certain it won't beggar you with repair costs. But a paid-for car is usually cheaper to own and run than a new car.
3. Hold a yard sale (or post on Craigslist, which is free) and sell anything you no longer need or want. It may surprise you how little people are willing to pay for your used goods. They may not buy them at all. A good reminder not to spend so much money on buying all that new stuff in the first place.
4. Empty your clothes closets into your suitcases. What you own doesn't fit? Reduce it until it does, and never buy a piece of clothing again without getting rid of a piece. Be mindful of this when you shop for clothing, because it is easy to think you need multiples when the truth is you don't. If your suitcases are full, you have enough clothes.
Add your own tips for getting out of debt if you've got 'em.
Saturday, May 28, 2011
No New Credit Cards Without Gifts
How glad I am not to be caught in the toils of the credit card companies. Another offer came in the mail today, full of talk of penalty fees and other disclosures of punitive rules if I do not pay my balance in full and on time. Frankly, I can’t see any reason to apply for this credit card. It didn’t even seem that the credit card company was making any effort to sell me on their card, other than the usual balance transfer offers. I have made use of balance transfers in the past to my advantage, but recently I decided that keeping some money liquid made more sense than borrowing it from these companies. Especially since at the middle-class level of investments where I sit, the earnings on my savings currently are pitiful.
Yes, pitiful. Less than 1%. Sometimes less than .1% Far less than the 3% or 4% a credit card would charge for a cash advance. Obviously in this economic climate it is cheaper to use my own money to finance what I want to buy. What is the point of saving when one’s money cannot earn money? Ah, I know. To have cash when I need it. Presto. The reason to keep rainy day savings in liquid form, not locked away in CDs or stocks.
This isn’t always the best strategy. If and when the Big Inflation that everyone predicts actually happens, it may make more sense to get some quick profits from CDs or other guaranteed investments. Maybe banks will hand out toasters for opening CDs, the way they did in the inflationary 1970s. Not that I need another toaster, but we all like free gifts, don’t we?
That’s my primary objection to the recent credit card offers I have received. Not only are they full of threats, but also they contain no free gifts. Oh, I can earn 1% cash back on my spending, but then I’d have to spend, wouldn’t I? Nah, not interested. Many years ago, I banked at the Bowery Savings Bank in New York. Almost every time I visited a branch, they were handing out a little gift. I still have the bright red yardstick they gave me one day. Who buys yardsticks, anyway? They’re always freebies from someone. Well, I loved the Bowery Savings Bank because they gave me those little gifts. Still do, although they have long since been swallowed up by another bank.
So, no, I don’t want your credit card. I don’t want to make myself the victim of yet another bloodthirsty credit card company whose only intention is to trip me up and charge me fee after fee. And yes, I want gifts. Real gifts.
Yes, pitiful. Less than 1%. Sometimes less than .1% Far less than the 3% or 4% a credit card would charge for a cash advance. Obviously in this economic climate it is cheaper to use my own money to finance what I want to buy. What is the point of saving when one’s money cannot earn money? Ah, I know. To have cash when I need it. Presto. The reason to keep rainy day savings in liquid form, not locked away in CDs or stocks.
This isn’t always the best strategy. If and when the Big Inflation that everyone predicts actually happens, it may make more sense to get some quick profits from CDs or other guaranteed investments. Maybe banks will hand out toasters for opening CDs, the way they did in the inflationary 1970s. Not that I need another toaster, but we all like free gifts, don’t we?
That’s my primary objection to the recent credit card offers I have received. Not only are they full of threats, but also they contain no free gifts. Oh, I can earn 1% cash back on my spending, but then I’d have to spend, wouldn’t I? Nah, not interested. Many years ago, I banked at the Bowery Savings Bank in New York. Almost every time I visited a branch, they were handing out a little gift. I still have the bright red yardstick they gave me one day. Who buys yardsticks, anyway? They’re always freebies from someone. Well, I loved the Bowery Savings Bank because they gave me those little gifts. Still do, although they have long since been swallowed up by another bank.
So, no, I don’t want your credit card. I don’t want to make myself the victim of yet another bloodthirsty credit card company whose only intention is to trip me up and charge me fee after fee. And yes, I want gifts. Real gifts.
Tuesday, May 17, 2011
Depressing Credit Error Situations
What do we do about news stories like this, that cite how cavalier credit reporting agencies are about our good names? They basically don’t care if they attribute someone else’s bad credit to us, and they hardly bother to make the corrections we ask for, regardless of how much documentation we supply. Innocent people often find they are unable to clear their credit reports of serious errors that conflate them with the guilty, which leads to denied employment or credit. This is bad.
A few tools to fight this nasty situation:
1. Check your credit reports religiously every few months.
2. If you spot an error, immediately take steps to have it corrected.
3. If all else fails, sue.
4. Change your name legally.
1. Check your credit reports. We’re all supposed to do this, but I am quite sure most of us don’t even get our one free annual credit report from each of the three major agencies. People with very common names should pay to check more often, or even seriously consider signing up for a credit alert service. Ordinarily, I wouldn’t recommend such a step, but common names can get mixed up far too easily. If you’ve ever had a serious problem with accuracy on your credit report, get your files locked, and do pay to have your files watched.
2. If you spot an error, get it corrected. I’m not claiming this will always be a simple process, but if you do it for little errors, you’ll have the experience to know what works and what doesn’t when a serious error occurs.
3. If all else fails, sue. If the police are coming to your door because you are being confused with a felon, you need paid legal assistance.
4. Change your name legally. I know, crazy idea, right? Not so crazy. By changing your name legally, you create a clear historical record of your ongoing financial activities, as opposed to any by your former doppelgangers. If “Jack Johnson” or “Cathy Taylor” keeps getting you into trouble because there are low-lifes with the same name, become Juwann Jacks or Caitlin Tawes. Seriously. Go a step further if you can and establish a name that doesn’t call up thousands of duplicates in an Internet phone book search like Zabasearch. You are less likely to be a victim of identity errors or theft if you change your name to an extremely unusual one.
A few tools to fight this nasty situation:
1. Check your credit reports religiously every few months.
2. If you spot an error, immediately take steps to have it corrected.
3. If all else fails, sue.
4. Change your name legally.
1. Check your credit reports. We’re all supposed to do this, but I am quite sure most of us don’t even get our one free annual credit report from each of the three major agencies. People with very common names should pay to check more often, or even seriously consider signing up for a credit alert service. Ordinarily, I wouldn’t recommend such a step, but common names can get mixed up far too easily. If you’ve ever had a serious problem with accuracy on your credit report, get your files locked, and do pay to have your files watched.
2. If you spot an error, get it corrected. I’m not claiming this will always be a simple process, but if you do it for little errors, you’ll have the experience to know what works and what doesn’t when a serious error occurs.
3. If all else fails, sue. If the police are coming to your door because you are being confused with a felon, you need paid legal assistance.
4. Change your name legally. I know, crazy idea, right? Not so crazy. By changing your name legally, you create a clear historical record of your ongoing financial activities, as opposed to any by your former doppelgangers. If “Jack Johnson” or “Cathy Taylor” keeps getting you into trouble because there are low-lifes with the same name, become Juwann Jacks or Caitlin Tawes. Seriously. Go a step further if you can and establish a name that doesn’t call up thousands of duplicates in an Internet phone book search like Zabasearch. You are less likely to be a victim of identity errors or theft if you change your name to an extremely unusual one.
Wednesday, May 11, 2011
Credit Card Fantasyland
Oh, this is scary. I heard an interview on NPR the other day in which the financial expert said she met a girl who couldn’t wait to get a credit card. Turned out the girl did not know that you have to pay back the money you spend when you buy on credit. Seriously, this was a teenager, not a five-year-old, and she did not understand the basic concept of credit.
Every time I watch one of those “we’re up to our eyeballs in debt” shows on CNBC, I get the creepy feeling that these people think the same way. They may say they want to pay off their debts, but you can see the self-will oozing out of them as they proudly admit to their insane spending habits. These usually consist of constant shopping sprees and the accumulation of vast piles of stuff, although sometimes as a change of pace it’s eating out and ATM advances. These people simply do not understand that credit is only a means of delaying paying. It’s not free money. Even creepier, the CNBC shows are about Canadians. They’re been infected by the same spending virus we have. More than one society has bought into the entitlement fantasy of materialistic accumulation via credit.
An entitlement fantasy is just that, a fantasy. We’ve all had them. They’re the daydreams in which we inherit a fortune from a relative we never met. Guilt-free money, because we didn’t even have to go to the funeral. Or we win the lottery. Effort-free money, because we didn’t have to do anything other than purchase a ticket and pose for a winner’s photo with that giant check. Most of us are aware these are fantasies. Apparently, some people are living with these fantasies as real scenarios in their heads. They live as if money grows on trees because credit cards allow them to pretend their fantasies are real. For a while. When they don't make their payments, they qualify for the new penalty APR of 29.99% that Fidelity Mastercard just instituted. Do all these crazy spenders really want to pay almost one third of the purchase price of every transaction to the bank? No. In their heart of hearts, our materialistic spenders don’t intend to pay the bank at all. Scary.
Every time I watch one of those “we’re up to our eyeballs in debt” shows on CNBC, I get the creepy feeling that these people think the same way. They may say they want to pay off their debts, but you can see the self-will oozing out of them as they proudly admit to their insane spending habits. These usually consist of constant shopping sprees and the accumulation of vast piles of stuff, although sometimes as a change of pace it’s eating out and ATM advances. These people simply do not understand that credit is only a means of delaying paying. It’s not free money. Even creepier, the CNBC shows are about Canadians. They’re been infected by the same spending virus we have. More than one society has bought into the entitlement fantasy of materialistic accumulation via credit.
An entitlement fantasy is just that, a fantasy. We’ve all had them. They’re the daydreams in which we inherit a fortune from a relative we never met. Guilt-free money, because we didn’t even have to go to the funeral. Or we win the lottery. Effort-free money, because we didn’t have to do anything other than purchase a ticket and pose for a winner’s photo with that giant check. Most of us are aware these are fantasies. Apparently, some people are living with these fantasies as real scenarios in their heads. They live as if money grows on trees because credit cards allow them to pretend their fantasies are real. For a while. When they don't make their payments, they qualify for the new penalty APR of 29.99% that Fidelity Mastercard just instituted. Do all these crazy spenders really want to pay almost one third of the purchase price of every transaction to the bank? No. In their heart of hearts, our materialistic spenders don’t intend to pay the bank at all. Scary.
Thursday, April 28, 2011
Is Strategic Default Moral Turpitude?
Strategic default is in the news because it is gaining popularity, and possibly may account for as much as 35% of all mortgage defaults. Strategic default happens when someone who can afford to pay the mortgage decides that it’s not worthwhile to keep doing so, and walks away. This is happening all over the country in situations where the value of homes has dropped substantially below the mortgage amount owed. It’s a daring strategy, not one usually employed by the meek middle classes. Financial writers tut-tut about this practice when individuals do it but strategic defaulters are simply taking a page from the behavior of large corporations. Corporations in our country are beyond feeling shame, but individuals until recently have not been.
Is strategic default an act of moral turpitude? Issues of right and wrong about money are very slippery. Historically, most of our ideas about money have been simple:
Pay cash.
Don’t incur debts, but if you do, pay them back.
That approach to money is now nearly obsolete. It’s in direct contradiction to the way we all have recently been trained to use money. Instead of waiting and saving up for something, we are pressed to buy now and pay later. We have been using capital leverage, i.e., credit, to do this. Just as the concept of paper money only works if everybody agrees that paper money actually is worth goods or services, so also the moral rules of money only work if everybody plays by them. Recently, we have seen egregious examples of companies that arrogantly refuse to be bound by even the most elemental moral rules, or even by regulatory laws. This creates an atmosphere of moral hazard. If the banking system is crooked and yet the banks don't have to pay and no one goes to jail, then why should individuals keep paying? Some people believe the only way to beat a rigged game is to stop playing the sucker. Walk away from a mortgage and the bank gets the house; that's what a secured loan is all about. End of obligation, both financial and moral. Yes, there’s a back-end income tax issue, and in some states the bank can come after you for what’s called the deficiency, but it’s still less hassle than the futile efforts people have been making to pay or modify mortgages they can’t afford.
The real hazard with strategic default is not moral, and it's not that the banks will go broke owning all these houses. It’s that if individuals feel free to act the way corporate crooks do, the entire financial system could grind to a halt. This system does not just depend on the Federal Reserve. It depends on every individual who accepts a paper dollar or a contract as worth something. Most people don’t believe that what they do has such potential for a far-reaching effect. We don’t know at what level strategic or other individual defaults will destroy the U.S. housing market entirely, but maybe we’re on the road to finding out. Meanwhile, the banks are not hurting, not when they seize homes worth $75,000 and sell them to investors for $30,000, while sticking the foreclosed owner with a tax liability for the “forgiven” $94,000 difference still owed on the mortgage. If it’s all a game, say the strategic defaulters, why shouldn’t they play to win?
It is not illegal to default on a mortgage. Right now is probably the best time to use the strategy, when so many others are doing it that one more default won't stand out from the crowd. Sure, your credit score takes a hit, but who says high credit scores are a moral imperative? Only FICO, which is in the business of collecting and selling credit scores, and therefore has a strong interest in making us all care terribly about scores. We have been brainwashed into believing we must behave in a certain way, or we will be punished by the Great God FICO. If substantial numbers of people have lowered scores, then the curve is lower, and who cares? A landlord will rent to someone with a low FICO score rather than let an apartment be vacant. A car dealer will make a deal with someone who has a low FICO score, because the dealer wants to make the sale. And so on.
Would I default on a mortgage? Probably I should have 20 years ago, when the country had a real estate crisis and housing values dropped precipitously. They stayed low for some years, but then they recovered big time. Will this current miserable part of the cycle ever end? I think so, but I hope you enjoy the house you’re living in right now, because rather than strategic default, there’s an even better plan: Just live in your house.
Is strategic default an act of moral turpitude? Issues of right and wrong about money are very slippery. Historically, most of our ideas about money have been simple:
Pay cash.
Don’t incur debts, but if you do, pay them back.
That approach to money is now nearly obsolete. It’s in direct contradiction to the way we all have recently been trained to use money. Instead of waiting and saving up for something, we are pressed to buy now and pay later. We have been using capital leverage, i.e., credit, to do this. Just as the concept of paper money only works if everybody agrees that paper money actually is worth goods or services, so also the moral rules of money only work if everybody plays by them. Recently, we have seen egregious examples of companies that arrogantly refuse to be bound by even the most elemental moral rules, or even by regulatory laws. This creates an atmosphere of moral hazard. If the banking system is crooked and yet the banks don't have to pay and no one goes to jail, then why should individuals keep paying? Some people believe the only way to beat a rigged game is to stop playing the sucker. Walk away from a mortgage and the bank gets the house; that's what a secured loan is all about. End of obligation, both financial and moral. Yes, there’s a back-end income tax issue, and in some states the bank can come after you for what’s called the deficiency, but it’s still less hassle than the futile efforts people have been making to pay or modify mortgages they can’t afford.
The real hazard with strategic default is not moral, and it's not that the banks will go broke owning all these houses. It’s that if individuals feel free to act the way corporate crooks do, the entire financial system could grind to a halt. This system does not just depend on the Federal Reserve. It depends on every individual who accepts a paper dollar or a contract as worth something. Most people don’t believe that what they do has such potential for a far-reaching effect. We don’t know at what level strategic or other individual defaults will destroy the U.S. housing market entirely, but maybe we’re on the road to finding out. Meanwhile, the banks are not hurting, not when they seize homes worth $75,000 and sell them to investors for $30,000, while sticking the foreclosed owner with a tax liability for the “forgiven” $94,000 difference still owed on the mortgage. If it’s all a game, say the strategic defaulters, why shouldn’t they play to win?
It is not illegal to default on a mortgage. Right now is probably the best time to use the strategy, when so many others are doing it that one more default won't stand out from the crowd. Sure, your credit score takes a hit, but who says high credit scores are a moral imperative? Only FICO, which is in the business of collecting and selling credit scores, and therefore has a strong interest in making us all care terribly about scores. We have been brainwashed into believing we must behave in a certain way, or we will be punished by the Great God FICO. If substantial numbers of people have lowered scores, then the curve is lower, and who cares? A landlord will rent to someone with a low FICO score rather than let an apartment be vacant. A car dealer will make a deal with someone who has a low FICO score, because the dealer wants to make the sale. And so on.
Would I default on a mortgage? Probably I should have 20 years ago, when the country had a real estate crisis and housing values dropped precipitously. They stayed low for some years, but then they recovered big time. Will this current miserable part of the cycle ever end? I think so, but I hope you enjoy the house you’re living in right now, because rather than strategic default, there’s an even better plan: Just live in your house.
Tuesday, April 12, 2011
Record-keeping Tips
Some people hate record-keeping and others love it, but here’s a dirty little secret: there is no right way or wrong way. Just pick or create the one that suits you best. Here are some popular ones:
1. Shoebox
2. File folder
3. Multiple file folders
4. Expanding file box
5. Ring binder
6. Software program
7. Physical ledger
8. Hybrid
For some of you, record-keeping will consist of throwing receipts in a shoebox. This is perfectly acceptable as long as it doesn’t drive you (or your spouse) crazy. Just don’t attempt to deliver that shoebox to a volunteer tax preparer. And don’t expect that a paid accountant will sort the contents of your shoebox for free. Or in April. Still, if everything is in one place, you have won more than half the battle of record-keeping. Really.
One step up from the shoebox method is the file folder. Same principle: it’s all in one place. Maybe you bothered to sort the items inside the folder into categories; maybe you didn’t. If sorting is not your thing, pay someone else to do it. Again, a tax professional will be pleased to find all your records in one folder, even if jumbled up.
Then there’s the multiple folder method, or the expanding file box method. Of the two, the file box method is best, because it keeps the records in one place. (Notice a theme here?) Multiple file folders have a way of wandering off and becoming invisible just when you need them.
I recently met someone who kept tax records in a three-ring binder. The binder was impressive but incomplete; she had failed to gather all the documents relating to her taxes. One of my co-volunteers complimented her on her record-keeping method, but I was not so inclined. The time she had spent getting the binder, punching the holes, and placing the papers inside would have been better used finding her pertinent documents. The binder made this person look organized, but that was an illusion.
Then there’s the “entering it into a software program” method. Unfortunately, many people I know have been suckered into thinking this is easier than just sorting the actual physical receipts. They usually confess (with surprise) to being behind on entering the data. They have a pile of papers next to their computer, and other piles elsewhere. They are convinced that this is the easiest method, but somehow, they’re never caught up. Record-keeping methods only work if you follow through and use them.
Some people keep ledgers. My mother recorded every single household expense. Reading her old ledgers is like reading the story of my family’s life, since every purchase is entered down to a candy bar. Most of us aren’t that careful. I used to keep a kind of ledger but nowhere near as complete. Mine consisted of two photocopied pages per month with each possible business expense being given a column. After a while I realized that most of the columns were empty most of the year. When I did have entries for them, there wasn’t enough space for the details. Travel was the problem. I didn’t travel often on business, but when I did, of course there were numerous tax deductible events during each trip. My one box per day per category record didn’t work for those. On the plus side, I could see at a glance exactly what my most frequent business expenses were, and adding them up was a mere matter of totaling each column.
I now do a combination method. I keep four file folders, labeled Bills, Tax Deductible, Banking, and Medical. Receipts are tossed into these files as I get them. Every few months, I sort the two biggest and messiest folders, Bills and Tax Deductible. (I never sort the Medical or Banking folders unless there’s a problem requiring research.) Sorting the contents of the folders takes maybe half an hour if I’m really stretching it out. Some other day I enter the items from the Tax Deductible folder into a computer spreadsheet. This takes another half an hour or so, depending on whether I have pre-sorted each category of expense and done it by date. If not, more time is consumed, but not much. This hybrid method works for me. I can be messy with my receipts when that’s my mood. And I can be precise with them when I’m feeling like handling details. I also let the computer do the addition.
Consider whether your current method of record-keeping is a good fit. Are you always losing papers, or behind on entering data, or finding that you have no place to put some category of receipt? These problems can be solved by choosing or creating the right record-keeping method. Just make sure you get a large enough shoebox.
1. Shoebox
2. File folder
3. Multiple file folders
4. Expanding file box
5. Ring binder
6. Software program
7. Physical ledger
8. Hybrid
For some of you, record-keeping will consist of throwing receipts in a shoebox. This is perfectly acceptable as long as it doesn’t drive you (or your spouse) crazy. Just don’t attempt to deliver that shoebox to a volunteer tax preparer. And don’t expect that a paid accountant will sort the contents of your shoebox for free. Or in April. Still, if everything is in one place, you have won more than half the battle of record-keeping. Really.
One step up from the shoebox method is the file folder. Same principle: it’s all in one place. Maybe you bothered to sort the items inside the folder into categories; maybe you didn’t. If sorting is not your thing, pay someone else to do it. Again, a tax professional will be pleased to find all your records in one folder, even if jumbled up.
Then there’s the multiple folder method, or the expanding file box method. Of the two, the file box method is best, because it keeps the records in one place. (Notice a theme here?) Multiple file folders have a way of wandering off and becoming invisible just when you need them.
I recently met someone who kept tax records in a three-ring binder. The binder was impressive but incomplete; she had failed to gather all the documents relating to her taxes. One of my co-volunteers complimented her on her record-keeping method, but I was not so inclined. The time she had spent getting the binder, punching the holes, and placing the papers inside would have been better used finding her pertinent documents. The binder made this person look organized, but that was an illusion.
Then there’s the “entering it into a software program” method. Unfortunately, many people I know have been suckered into thinking this is easier than just sorting the actual physical receipts. They usually confess (with surprise) to being behind on entering the data. They have a pile of papers next to their computer, and other piles elsewhere. They are convinced that this is the easiest method, but somehow, they’re never caught up. Record-keeping methods only work if you follow through and use them.
Some people keep ledgers. My mother recorded every single household expense. Reading her old ledgers is like reading the story of my family’s life, since every purchase is entered down to a candy bar. Most of us aren’t that careful. I used to keep a kind of ledger but nowhere near as complete. Mine consisted of two photocopied pages per month with each possible business expense being given a column. After a while I realized that most of the columns were empty most of the year. When I did have entries for them, there wasn’t enough space for the details. Travel was the problem. I didn’t travel often on business, but when I did, of course there were numerous tax deductible events during each trip. My one box per day per category record didn’t work for those. On the plus side, I could see at a glance exactly what my most frequent business expenses were, and adding them up was a mere matter of totaling each column.
I now do a combination method. I keep four file folders, labeled Bills, Tax Deductible, Banking, and Medical. Receipts are tossed into these files as I get them. Every few months, I sort the two biggest and messiest folders, Bills and Tax Deductible. (I never sort the Medical or Banking folders unless there’s a problem requiring research.) Sorting the contents of the folders takes maybe half an hour if I’m really stretching it out. Some other day I enter the items from the Tax Deductible folder into a computer spreadsheet. This takes another half an hour or so, depending on whether I have pre-sorted each category of expense and done it by date. If not, more time is consumed, but not much. This hybrid method works for me. I can be messy with my receipts when that’s my mood. And I can be precise with them when I’m feeling like handling details. I also let the computer do the addition.
Consider whether your current method of record-keeping is a good fit. Are you always losing papers, or behind on entering data, or finding that you have no place to put some category of receipt? These problems can be solved by choosing or creating the right record-keeping method. Just make sure you get a large enough shoebox.
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