Finance tips for this generation

By Terrence Stoker

Times, they are a changing. Personal finances, priorities and their frameworks change from each generation to the next.

While your grandfather may have some excellent methods of how he managed his finances during the earlier years, often the changing face of modern economics will render his advice less than perfect.

So what are some of the key lessons that we can pass on to this generation that will make their financial lives easier to manage? Managing the little lessons of finance now and following them throughout our adult lives can lead to larger and more important rewards in your later years.

 

Organising your finances

Make a concerted effort to track all your finances in some form. With the multitude of personal finance apps and the familiarity of people of the computer generation to make use of spreadsheets and simpler software to track finances is easier than ever before.

Gone are the days of shoe-boxes of receipts, most days simply by using the data form your internet banking accounts, its simple to mark your expenditure and income for each month. If you are using these digital systems, try to use cash as often as possible as it’s easier to keep records of, and most banks have flat card transactions rates.

Set up monthly savings payments into your account or ask your employer about long term retirement fund options. Your employer will often have policies such as the 401k (if you’re in the US) where before tax you will get an allocation of your salary paid into a long term savings account.

Many employers will contribute to this as well to improve your growth year in and year out.  If your employer does not offer a retirement plan package for their staff, ensure that you set up monthly debit orders at the beginning of the month to put away a savings amount that you can invest on your own.

 

Dealing with debt

Prioritise any long term credit payments so that they work for you. Many of us throughout our life will require some form of credit, be they mortgages, bonds, student or personal loans. Make sure that you manage the repayments in priorities, for example focus on paying those with the highest interest rates back first.

Check the stipulations of each contract and pay back the credit earlier that yields you benefits for early payment. Some long term credit has no benefit for early payment and can actually cause you to be penalised by the lender.

Personal finances have changed greatly over the last few decades, from apps, payment methods and lending systems based on the modern economy. Make sure you keep up with the times, watch your cash flow and ensure that you start saving early for the benefits during the rainy days. 

Terrence Stoker is a Blogger with a keen interest in the development of finances over the ages. Whether its savings, loans or day to day expenses, Terrence is fascinated in ways that he can control finances better, simpler and make the execution of his budgeting faster each and every month.

How to pay bills

 Image attribution: Stuart Miles; Standard royalty free license

Prioritizing expenses can reduce the cost of debt while also maintaining essential services needed for day to day household functioning. Knowing how to prioritize expenses can also help ensure adequate retirement planning and avoid having important services cut off.

In order to prioritize expenses, it is important to first have a budget that assigns portions of money to the expenses before they are paid. This budget can help maintain consistency in financial planning and facilitates the prioritizing of expenses.

• Utilities and insurance

Without utilities and insurance, living becomes difficult and potentially dangerous. Without the basics of day to day life, performing income generating tasks, and maintaining focus on other priorities is challenged. For this reason, it makes sense to first pay those expenses that allow one to function in such a way that other debt payments are more likely to be made or facilitated.

• Low balance accounts

A debt prioritization technique advocated for in the ‘Military Spouse Finance Guide’ is snowballing debt. This method starts by paying the largest amount to the smallest debt, then rolls over the funds used to pay that expense into the next largest debt. The theoretical affect of snowballing is with each consecutive debt that is paid off, a larger amount of money becomes available to pay off larger debts.  

• Revolving credit

Revolving credit has a greater affect on credit rating than installment debt such as auto loans according to the Fair Isaac Corporation, paying down revolving credit such as credit cards has the greatest impact on credit score in terms of debt payment. Due to this, and the idea that credit cards often tend to have higher interest rates than auto loans and other types of installment loans, prioritizing credit expenses first can be a good idea.

• High interest debt

Naturally, high interest debt should also be paid. Even if it is just minimum payments, keeping this type of debt in check and on slow balance decline is useful in reducing overall debt and improving credit score. If this type of debt only constitutes a small fraction of total income and a large amount of total expenses, paying it off slowly helps maintain a credit history.

• Retirement expense

Saving for retirement may be put off and neglected for more immediate financial concerns. To an extent this makes sense, but eliminating retirement expenses from a budget altogether can be a bad idea. The earlier one starts contributing to a retirement fund, the less money is needed to include this expense among financial priorities so it makes sense to start early even if it means paying debt off more slowly.

Another key factor in properly prioritizing debt is managing new expenses. If the U.S. Bureau of Economic Statistics is a valid indicator, the U.S. national saving rate ranged between approximately one and seven percent between 2004-2010. This means a high rate of expenditure is prevalent throughout the country and that prioritization of debt can be helpful.

In light of national savings levels, new expenditures might best be avoided in order to lower debt to income, and credit to credit limit ratios. Since many people have higher debt and credit ratios, the task of prioritizing debt is made more difficult. However, if no new expenses are taken on, and expenses are less than 99 percent of total income, the prioritization of expenses can be beneficial when budgeted for accordingly.

How Does Filing Bankruptcy Affect IRS Tax Debt

Filing for bankruptcy may or may not affect Internal Revenue Service (IRS) debt depending on 1) the type of bankruptcy, 2) judicial decisions, 3) IRS regulations and 4) Documentation filed with the IRS by the individual or persons filing for bankruptcy.

There is no one answer for how bankruptcy affects taxes because there are multiple situations and rules that affect money owed. In light of this, a methodology for assessing tax due to IRS is discussed hereafter. Numerous factors can affect whether or not, and how much tax a bankruptcy petition filer may owe in taxes. Some of these factors are listed below:

• Ability to repay as assessed by the IRS
• Formal discharge of tax debt by bankruptcy court
• Compliance with tax code and bankruptcy regulations
• Taxable bankruptcy exempt assets owned by the filer
• Carrying out of tax and bankruptcy related filings

Direct tax benefits of filing for bankruptcy

Bankruptcy can affect IRS debt by legally demonstrating the inability to pay taxes. This inability to pay taxes can be determined by both the bankruptcy court and the Internal Revenue Service.

Filing for bankruptcy can also affect IRS debt by reducing the total amount of assets one owns that can be used for the purpose of paying taxes depending on the priority of debt in order of repayment.

Since bankruptcy is a second chance financially, taxes that do not enable this second chance in principle may be exempt from repayment. Some of the ways filing for bankruptcy may affect IRS debt are as follows:

• May redistribute payment obligations
• Taxes due can be negotiated with the IRS
• May reduce taxable value of personal assets
• Can limit tax liens and back taxes due

Bankruptcy tax assessment methodology

Since the purpose of bankruptcy is to reduce or make debt manageable, taxes due to the IRS are no exception. For this reason, realistically, factually and thoroughly approaching the question of how filing for bankruptcy affects IRS tax debt may involve a number of techniques, and/or methodologies. An example methodology is provided below.

1. Determine type of bankruptcy and if judicial rule will override IRS regulation
2. Identify assets not included in the bankruptcy which taxes may be due against
3. Consult with the IRS bankruptcy division, and bankruptcy lawyer
4. File an ‘offer in compromise’, IRS Form and other required documents

IRS tax forms used in relation to bankruptcy

Extensive documentation is often required for bankruptcy filing as debtors, the bankruptcy court, and the IRS should all be made aware of the financial scenario the party filing for bankruptcy faces in order to determine, and asses payment or non-repayment of debt obligations. In terms of IRS debt, some of the forms and information used during bankruptcy proceedings include those mentioned below:

• IRS Form 656-Offer in compromise
• IRS Form 1040 (and related documents)
• Internal Revenue Bulletin (IRB) 2006-40
• IRS Publication 538: Offer in compromise information
• Information pertaining to reduced tax year filing during bankruptcy
• IRS Publication 908: Bankruptcy tax guide
• Bankruptcy Abuse Prevention And Consumer Protection Act of 2005: BAPCPA ACT: Title VII

Bankruptcy filing tips

Filing for bankruptcy involves bankruptcy law, US Statutory law and dynamic individual financial situations. For this reason not seeking professional assistance is generally not a good idea. There are many legal requirements, options and stipulations that if not abided by, may disqualify, hamper or reduce the potential tax advantages of filing for bankruptcy. Hence, the following tips are not guaranteed to be completely accurate due to the complexity of tax law, and are just a few of the several things to consider when dealing with taxes due to the IRS when filing for bankruptcy.

• File taxes regardless of bankruptcy. Not doing so can complicate or disqualify the bankruptcy.

• For a chapter 7 bankruptcy, File an IRS Form 1040 shortly after the bankruptcy case begins. This can minimize the amount of tax due under Section 1398 of Title 26 of the US Code. IRS Publication 538 has more information on this.

• Utilize all legal bankruptcy related tax deductions, reduction techniques and options to minimize non-qualifying tax debt. For example deduct bankruptcy lawyer fees in Schedule A of bankruptcy tax year.

• Signing over of real estate that had equity value prior to bankruptcy filing to an offshore trust may protect the equity in the property from tax liens if in compliance with U.S. Code statutory law.

• Some taxes from tax years prior to filing for bankruptcy may still be claimed by the IRS

• For unanswered questions or concerns contact the IRS Taxpayer Advocate Service at 1-877-777-4778 and/or speak with a qualified tax professional.

Sources consulted:

1. http://www.moranlaw.net/taxfaq.htm (Moran Law Firm)
2. http://www.irs.gov/pub/irs-pdf/p908.pdf (Internal Revenue Service)
3. http://www.mckenzielaw.com/BANKRUPT.html (Mckenzie law firm)