<iframe src="https://5923915.fls.doubleclick.net/activityi;src=5923915;type=hbx_core;cat=hbx_b0;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;ord=1;num=1?" width="1" height="1" frameborder="0" style="display:none">
HBX Business Blog

Jackie Merriam

Recent Posts

Spring Cleaning Your Personal Budget

Posted by Jackie Merriam on May 26, 2017 at 1:32 PM

AdobeStock_Budegt Clean [Converted]-835332-edited.png

Whether you track every penny you spend, or just periodically check your bank account and credit card balances, everyone maintains a budget to some extent. You could use an app, a spreadsheet, or keep track in your head, but it’s important to know how much money you have coming in, and how much you spend, for a given period of time.

Regardless of how you keep your budget, it is a good idea to evaluate your financial position at least once a year and think about how you could make better use of your money. These tips will help you to evaluate your habits, lower your spending, and improve your planning for the future.

Evaluate the Balances in your Accounts

There are three types of cash accounts that people should have: 

  • Checking Account 
    Your checking account should only have enough to cover your monthly expenditures. You should not be spending more than you make, so a general rule of thumb is to maintain the equivalent of one month’s pay in this account. This account balance will fluctuate a lot because there is constantly money going in and coming out, but this account should not be consistently growing over time, because it doesn’t earn interest. If you find that this account has grown over time, you should consider moving some of the funds to a savings account.
  • Emergency/Liquid Savings 
    Think of this as your Rainy Day Fund, used to keep a cash buffer in case of an emergency (i.e. losing your job) or to save money for known future expenditures, like a down payment for a house. These funds should be kept in interest bearing, yet liquid accounts, such as a simple interest bearing savings account, where you can access the money at a moment’s notice, without penalty. You should keep between 3-9 months’ worth of expenditures in this account for emergencies in addition to any money you are saving for a specific future event.
  • Long-Term/Illiquid Savings 
    These are generally retirement accounts that don’t allow you to withdraw money early, or that would incur a penalty if you did. You should be putting some amount into these accounts monthly—every little bit helps!

Review Auto-Renewal Payments

We are creatures of habit, and it’s important to know how much our habits are costing us. We all have things that we pay for on a regular basis that are automatically deducted from our bank account or charged to our credit cards. This can include subscriptions and memberships that give you access to certain benefits (such as app subscriptions, video streaming services, Amazon Prime, gym memberships, etc.). 

One survey estimates that the average consumer has 11 of these charges each month. While the individual amounts are usually small, they add up quickly.

To clean these up, grab your most recent bank and credit card statements and mark all of the items that are recurring or auto-renew. Add them up—you may be surprised by the total! As you go through these, ask yourself a series of questions about each:

  • Did I cancel this? Is this what I ordered?
    Try to find confirmations of your cancellations and call the company to investigate why you are being charged. They should be able to offer a refund if you are being charged incorrectly.
  • How much do I actually use the product/service? Is it worth it?
    For some payments, it might help to think about a per-day or a per-use cost. For example, if you pay $15 per month for a photo editing software, but you only use it to edit 2 photos per month, you are paying $7.50 per photo. Another way to think about this is to put it in yearly terms; if you kept this up you would be paying $180 per year to edit 24 photos.

    For payments that get you access to certain benefits, especially those that are intended to save you money in the long term, determine if the benefit you received was greater than the cost. A great example of this is Amazon Prime. Some of these memberships keep track of all your savings, and you may also be able to access this information in your online account. If the amount you saved is less than the cost you paid to get the service, it’s probably not worth it!

    For items that auto-renew at intervals longer than one month, put a reminder on your calendar a few weeks before it renews. When you get the reminder, think about whether or not you actually use what you are paying for, and decide to renew or cancel it before you get charged.

  • Could I be paying less?
    Especially for items where you pay on a monthly basis, like your cell phone, internet, or cable, check to see if you could save money by changing your payment plan. Many companies offer discounts to people who pay for 6 months or one year at a time, as opposed to one month at a time. If it’s something you have determined is worth it to you, see if you could take advantage of these savings!

    The answers to these questions are going to be different for every person. However, don’t make the mistake of thinking you will change your patterns—if you aren’t using something now, you probably won’t use it in the future!

Don’t forget about your infrequent expenses

Most people have a pretty good idea of their regular expenses that are frequently recurring. You know (or you should know!) how much you spend every month on rent, student loan payments, and car payments. You also probably know roughly how much you spend each month on necessities like food, utilities and gas. 

However, many people struggle to plan for big expenses that are more infrequent, but still fairly certain to occur, such as:

  • Car or home insurance, usually paid once or twice annually
  • Somewhat predictable car and home repairs
  • Taxes (if you are expecting a refund don’t forget to budget for that too!)
  • An annual trip home for the holidays

Know your patterns and don’t forget about these less frequent expenditures. For example, if you are expecting to have to purchase new tires for your car in the next four months, start saving a little money for that today. It’s much easier to save a little bit at a time for these expenses than to have to deduct it from your budget all at once.

Reevaluate your long-term savings plan

No matter how old you are or where you are in your career, you should be saving for retirement. When it comes to building your savings, time is your friend. The longer you are able to save, the more your savings will be able to grow, and the effects in the future are exponential. 

An easy way to do this is to ensure that you are taking advantage of everything that your employer offers. Employer-sponsored plans are beneficial for many reasons, including certain tax breaks and deductions straight from your paycheck.

Here are a few things to consider with employer-sponsored retirement plans:

  • Some employers require you to “opt-in” to the retirement plans. Make sure that you do this! If you don’t opt in, you could go months or years without contributing anything to your retirement plan.
  • Many employers offer a matching program where they will match any contributions you make to a retirement plan, up to a certain amount. You should contribute at least as much as this limit so that you are getting the full benefit of the match.
  • You set the amount or percent of your pay that goes to the plan. Determine if you can increase your contribution, even an additional 1% per paycheck can make a big difference!

Every employer offers different things, so talk with an HR or benefits officer at your employer to get the full scope of the benefits. It may also be worth it to speak with a financial advisor about other savings options that you might be able to take advantage of, especially if you feel that you employer doesn’t offer exactly what you are looking for.


Want to learn more about Finance, Accounting, Economics and Analytics?

Learn more about HBX CORe


About the Author

Jackie Blog Round.pngJackie is a member of the HBX Course Delivery Team and currently works on the Financial Accounting course for the Credential of Readiness (CORe) program. She also works on the Leading with Finance Course, and is working to design and develop a course in Entrepreneurship for the HBX Platform.

Jackie holds a BSB in Accounting and Finance, and a Masters of Accountancy, all from the University of Minnesota. In her free time she enjoys cheering on her favorite Minnesota sports teams and baking.

Topics: HBX Finance, HBX tips, Financial Accounting

A Beginner's Guide to Understanding Your Taxes

Posted by Jackie Merriam on April 6, 2017 at 4:18 PM

A Beginner's Guide to Understanding Your Taxes - Frightened man clutching money runs away from a dog in a TAX sweater

If you live in the United States, it’s that time of year again! Have you filed your taxes yet? April 18 is the filing deadline for individual income tax returns (Procrastinators, rejoice! You have three extra days to file this year).

While the various tax forms, rules, and regulations can be confusing, the basic tax formula is actually pretty simple. If you break it down, your tax refund or the tax you have to pay is calculated like this:

Total Income - Deductions = Adjusted Gross IncomeAdjusted Gross Income - Exemptions - Standard or Itemized Deducions = Taxable IncomeTaxable Income x Tax Rate = TaxTax - Credits = Total Taxes OwedTotal Taxes Owed - Taxes Already Paid = Refund Amount

 

Seems easy enough, right? But what do each of those terms actually mean? 

Total Income vs. Adjusted Gross Income (AGI) vs. Taxable Income

There are many “income” amounts that appear on your tax forms.

Total Income simply represents all the money that you made in compensation during the year—whether that was from your employer, through investment interest, or other forms of compensation.

Adjusted Gross Income (AGI) is the amount of money that you made this year, less any specific deductions.

Taxable Income is the amount that you will use to calculate your tax.

Deductions vs. Credits

Deductions and credits are very similar, in that they both reduce your tax, but how and when they reduce your tax differs.

Deductions are amounts that you subtract from your income, and are taken out before you calculate the total tax owed.

Credits are amounts that are taken out after you have already calculated your tax, so they reduce your tax directly. Credits are generally more beneficial than deductions because they reduce your tax directly dollar-for-dollar, whereas deductions reduce your taxes indirectly by reducing your income.

To illustrate this, let’s take a simple example. Say that you made $100 this year, and your tax rate is 10%. Let’s say that you have an option to take a $15 deduction or a $15 credit. These two options can be illustrated with the formulas below:

 

  Deduction Option

  Credit Option 

Total Income      $100    $100 
–  Deductions       -   $15        -   $0  

 
 
AGI      $85      $100 
         
Tax (AGI x 10%)      $8.50     $10 
–  Credits    $0   $15 

 
 
Total Tax      $8.50     $5 refund

In this example, if you take the credit you actually don’t owe any tax, but if you take the deduction you would owe $8.50 of tax. This simple illustration shows that credits are (almost always) more beneficial than deductions.

Why do credits and deductions exist? Well, it isn’t because the government wants to reduce your tax liability out of the goodness of their heart. They exist because the government is trying to incentivize certain behavior. For example, they want people to pursue higher education, so there are tuition deductions and credits and student loan interest is deductible.

Standard vs. Itemized Deduction

While all other deductions apply to people differently, every tax payer is entitled to either the Standard or Itemized Deduction.

The Standard Deduction is a set amount that every tax payer can subtract from their income. The amount varies depending on your filing status, but it is adjusted each year to account for inflation.

Taxpayers also have the option to itemize their deductions. Itemized Deductions are the total of specific amounts, including medical and dental expenses, amounts given to charity, amounts lost to theft, taxes and interest paid, and any job expenses that were not reimbursed by your employer.

If the total of all these amounts is greater than the standard deduction amount, you should itemize your deductions. If the total of these amounts is less than the standard deduction, you should take the standard deduction.

Part of the reason that the standard deduction exists is because, for most people, the things that are included on the itemized deduction list are often hard to track and value. For example, giving a box of clothing to your local charity is deductible, but the value of that clothing is often subjective and hard to determine. You also may give small amounts of money to charities here and there that would be hard to track over the year.

Under this system, taxpayers can still take a deduction, without having to worry about tracking every dollar. IRS data indicates that roughly 30% of Americans itemize their deductions, and high-income taxpayers are more likely to itemize.

Exemptions

Each taxpayer who is not claimed as a dependent can claim a personal exemption. Taxpayers can also claim an exemption for each person that they list as a dependent. The exemption is a standard amount that reduces your adjusted income.

To determine your exemption, simply count the number of dependents that you claim (including yourself and your spouse) and multiply it by the exemption amount. Exemptions reduce your income to account for the fact that you have to pay money to take care of yourself and attempt to align the tax amount with a household’s ability to pay tax. 

There are hundreds of pages of rules and regulations in the Internal Revenue Code, and it changes constantly, but these simple terms will help you to better understand your return.


About the Author

Jackie Blog Round.pngJackie is a member of the HBX Course Delivery Team and currently works on the Financial Accounting course for the Credential of Readiness (CORe) program. She also works on the Leading with Finance Course, and is working to design and develop a course in Entrepreneurship for the HBX Platform.

Jackie holds a BSB in Accounting in Finance, and a Masters of Accountancy, all from the University of Minnesota. In her free time she enjoys cheering on her favorite Minnesota sports teams and baking.

Topics: HBX CORe, Financial Accounting

Word of the Week: Convergence

Posted by Jackie Merriam on February 21, 2017 at 4:10 PM

globe.png

Accounting is the system that companies use to record and present information. It is a language of sorts that businesses use to communicate to internal and external parties. While the debits and credits of accounting are the same in every country, the set of rules and standards that companies use to record and report specific transactions vary across the globe.

The most prominent set of global accounting standards is the International Financial Reporting Standards (IFRS). There are 120 countries that either require or permit companies to use IFRS or have a national equivalent to IFRS that is different only in name[1]. In the United States, companies are required to use US Generally Accepted Accounting Principles (US GAAP). There are significant differences between IFRS and US GAAP.

Why is this such a big deal? As business dealings become more globalized, it is imperative for users of the financial statements to be able to compare companies across countries. Put simply, companies that report under US GAAP are not speaking the same language as companies that report under IFRS. Since US companies account for a great deal of economic activity, this only makes international business and investment decisions more difficult.

Recognizing this problem, in 2002 the US standard setting body (the Financial Accounting Standards Board, or FASB) and its international counterpart (the International Accounting Standards board, or IASB) issued a joint Memorandum of Understanding that marked the formalization of their commitment to converge the US GAAP and IFRS standards. This began the process of ‘convergence’.

The goal of convergence has been to maintain two separate sets of standards, but to make them the same in principal. In areas with differences, the Boards agreed to adopt the standard they deemed as preferable, whether that was the US GAAP or IFRS standard, or some sort of combination of the two. However, this goal was not achievable in every case. In some cases, the new published standards still have significant differences, and in other cases the boards dropped convergence efforts because they simply could not come to an agreement. While both Boards are still working towards convergence, many think that true convergence will ultimately never be achieved.  

If you are interested in learning more about the convergence timetable and progress, you can visit either the FASB’s or IASB’s convergence project webpages.

[1] http://www.ifrs.com/ifrs_faqs.html#q3


About the Author

Jackie is a member of the HBX Course Delivery Team and currently works on the Financial Accounting course for the Credential of Readiness (CORe) program. She also works on the Leading with Finance Course, and is working to design and develop courses in Entrepreneurship for the HBX Platform. Jackie holds a BSB in Accounting in Finance, and a Master’s of Accountancy, all from the University of Minnesota. In her free time she enjoys cheering on her favorite Minnesota sports teams and baking.