Personal Financial Planning: An "How-To" Guide (part 16)

Your Filing Status

by

Charles Lamson

The taxes you pay depend in part on your filing status, which is based on your marital status and family situation on the last day of your tax year (usually December 31). Filing status affects whether you are required to file an income tax return, the amount of your standard deduction, and your tax rate. If you have a choice of filing status, you should calculate your taxes both ways and choose the status that results in the lower tax liability. There are five different filing status categories:

• Single taxpayers: Unmarried or legally separated from their spouses by either a separation or final divorce decree.
• Married filing jointly: Married couples who combine their income and allowable deductions and file one tax return.
• Married filing separately: Each spouse files his or her own return, reporting only his or her income, deductions, and exemptions
• Head of household: A taxpayer who is unmarried or considered unmarried and pays more than half of the cost of keeping up a home for himself or herself and an eligible dependent child or relative.
• Qualifying widow or widower with dependent child: A person whose spouse died within 2 years of the tax year and who supports a dependent child may use joint return tax rates and is eligible for the highest standard deduction. (After the two-year period, such a person may file under the head of household status if he or she qualifies.)

In general, married taxpayers who file jointly have a lower tax liability than if they file separately. However, sometimes these married couples pay more in total taxes than if they were single taxpayers. Combining the two incomes results in bracket creep---it pushes the couple into a higher tax bracket resulting in a "marriage tax." In an attempt to eliminate the marriage tax, 2003 tax legislation lowered taxes for married couples by making the standard deduction and the 15-percent bracket twice as large for couples compared with singles. There is not too much you can do if you are in a situation where filing jointly results in paying a marriage penalty, because it is illegal for married individuals to use the single filing status. But a couple planning a December wedding may reap considerable tax savings by postponing their wedding until January!

The tax brackets (rates) and payments for married couples filing separately are typically higher than for joint filers because the spouses rarely account for equal amounts of taxable income. In some cases, however, it may be advantageous for spouses to file separate returns. For instance, if one spouse has a moderate income and substantial medical expenses, filing separately may provide a tax savings. It is worth your time to calculate your taxes under both scenarios to see which results in the lower amount.

Every individual or married couple who earns a specified level of income is required to file a tax return. Like the personal tax rates, these minimums are adjusted annually based on the annual rate of inflation, and they are published in the instructions that accompany each year's tax forms. Note that if your income falls below the prevailing minimum levels, you are required to file a tax return. However, if you had any tax withheld during the year, you must file a tax return---even if your income falls below the prevailing minimum filing amounts---to receive a refund of these funds.

Your Take-Home Pay

Although many of us do not give much thought to taxes until April 15 approaches, we actually pay taxes as we earn income throughout the year. Under this pay-as-you-go system, your employer withholds (deducts) a portion of your income every pay period and periodically sends it to the IRS. Self-employed persons must likewise deduct and forward a portion of their income to the IRS each quarter. The amounts withheld are based on taxpayer's estimated tax liability. After the close of the taxable year, you calculate the actual taxes you owe and file your tax return. When you file, you receive full credit for the amount of taxes withheld from your income during the year and either (1) receive a refund from the IRS (if too much tax was withheld from your paycheck), or (2) have to pay additional taxes (if the amount withheld did not cover your tax liability). Your employer normally withholds funds for not only federal income taxes, but also for FICA (or Social Security) taxes and, if applicable, state and local income taxes. In addition to taxes, you may have other deductions for items such as life and health insurance, savings plans, retirement programs, professional or union dues, or charitable contributions---all of which lower your take-home pay. Your take-home pay is what you are left with after subtracting the amount withheld from your gross earnings.


Federal Withholding Taxes

The amount of federal withholding taxes deducted from your gross earnings each pay period depends on both the level of your earnings and the number of withholding allowances you have claimed on a form called a W-4, which you must complete for your employer. Withholding allowances reduce the amount of taxes withheld from your income. A taxpayer is entitled to one allowance for himself or herself, one for a spouse (if filing jointly), and one for each dependent claimed. In addition, you qualify for a special allowance if (1) you are single and have one job; (2) you are married, have only one job, and have a nonworking spouse; or (3) your wages from a second job or your spouse's wages (or the total of both) are $1,000 or less. Additional withholding allowances can be claimed by (1) heads of households, (2) those with at least $1,500 of child or dependent care expenses for which they plan to claim a credit, and (3) those with an unusually large amount of deductions. Of course, you can elect to have your employer withhold amounts greater than those prescribed by the withholding tables.

If you know you will work less than 8 months during a year---as you would if you are a college graduate starting your first job in the summer---you can ask your employer to calculate withholding using the part-year method. This method calculates withholding on what you actually earn in the tax year, rather than your annual salary. 


FICA and Other Withholding Taxes

In addition to withholding on earnings, all employed workers (except certain federal employees) have to pay a combined old-age, survivor's, disability, and hospital insurance tax under provisions of the Federal Insurance Contributions Act (FICA). Known more commonly as the Social Security tax, it is paid equally by employer and employee. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.-Jan 4, 2018 - (source: https://www.irs.gov/taxtopics/tc751).

Most states have their own income taxes, which differ from state to state. Some cities assess income taxes as well. These state and local income taxes will also be withheld from earnings. They are deductable on federal returns, but deductability of federal taxes on the state or local return depends on state and local laws.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, MICHAEL D. JOEHNK, LAWRENCE J. GITMAN, PGS. 92-94*

END

Personal Financial Planning: An "How-To" Guide (part 15)

Understanding Federal Income Tax Principals

by

Charles Lamson

A typical American family currently pays about one-third of its gross income in taxes: federal income and Social Security taxes on numerous state and local income, sales, and federal income and Social Security taxes and numerous state and local income, sales, and property taxes. Although you may think of tax planning as a year-round activity. You should always consider tax consequences when developing and revising your financial plans and making major financial decisions, such as purchasing a home and investing.

The overriding objective of tax planning is very simple: to maximize the amount of money you keep by minimizing the amount of taxes you pay. As long as it is done honestly and within the tax codes, there is nothing immoral, illegal, or unethical about trying to minimize your tax bill. Most tax planning centers on ways to minimize income and estate taxes. The next couple posts concentrate on income taxes paid by individuals, particularly, the federal income tax, the largest and most important tax for most taxpayers.

Federal, state, and local tax receipts fund government activities and a wide variety of public services, from national defense to local libraries. The administration and enforcement of Federal tax laws is the responsibility of the IRS, a part of the U.S. Department of Treasury.

Although the largest tax a person will normally pay is federal income tax, there are other forms of taxes to contend with. For example, additional federal taxes may be levied on income and on certain types of transactions. At the state and local levels, sales transactions, income, property ownership, and licenses may be taxed. Because most individuals have to pay many of these other types of taxes, you should evaluate their impact on your financial decisions. Thus, a person saving to purchase a new automobile costing $18,000 should realize that the state and local sales taxes as well as the cost of license plates and registration, may add another $1,500 or more to the total cost of the car.

Smart.sites How long does the average American have to work this year to pay federal, state, and local taxes? Get the answer at the Tax Foundation Web site, www.taxfoundation.org. You’ll also find information there about tax policy, tax rates, tax collections, and the economics of taxation.

Because tax laws are complicated and subject to frequent revision, I will present key concepts and show how they apply to common tax situations. The provisions of the tax code may change annually with regard to tax rates, amounts and types of deductions and personal exemptions, and similar items. Often these changes are not finalized until late in the year. Although tax rates and other provisions will change, the basic procedures will remain the same. Before preparing your tax returns, be sure to review the current regulations; IRS publications and other tax preparation guides should be helpful in this regard.

The Economics of Income Taxes

It should come as little surprise to learn that most people simply do not like to pay taxes. Some of this feeling undoubtedly stems from the widely held perception that a lot of government spending amounts to little more than bureaucratic waste. But a good deal of this feeling is probably also due to the fact that taxpayers get nothing tangible in return for their money. After all, paying taxes is not like spending $7,000 on furniture, a boat, or a European vacation. The fact is we too often tend to overlook or take for granted the many services that are provided by the taxes we pay---public schools and state colleges, roads and highways, and parks and recreational facilities, not to mention police and fire protection, retirement benefits, and many other health and social services.

Income taxes provide the major source of revenue for the federal government. Personal income taxes are scaled on progressive rates. A progressive tax takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay. A progressive tax system might, for example, tax low-income taxpayers at 10 percent, middle-income taxpayers at 15 percent and high-income taxpayers at 30 percent.

As income moves from a lower to a higher bracket, the higher rate applies only to the additional income in that bracket and not to the entire income. For example, consider two single brothers Jason and David, with taxable incomes of $40,000 and $80,000.

Jason pays a 25 percent rate only on that portion of the $40,000 in income that exceeds $28,400. As a result of this kind of progressive scale, the more money you make, the progressively more you pay in taxes: Although David's taxable income is twice that of Jason's, his income tax is about 2.5 times higher than his brother's.

The tax rate for each bracket---10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent---is called the marginal tax rate, or the rate applied to an additional dollar of taxable income. When you relate the amount of taxes paid to the level of income earned, the tax rate, called the average tax rate, drops considerably. Jason's average tax rate, calculated by dividing the tax liability by taxable income, is 17 percent ($6,810/$40,000). David's average tax rate 21.4 percent ($17,146/$80,000). Clearly, taxes are still progressive, and the average size of the bite is not as bad as the stated tax rate might suggest.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 90-92* 

END

Smart.sites

How long does the average American have to work
this year to pay federal, state, and local taxes? Get
the answer at the Tax Foundation Web site,
www.taxfoundation.org. You’ll also find information
there about tax policy, tax rates, tax collections, and
the economics of taxation.

Personal Financial Planning: An "How-To" Guide (part 14)

Cash In/Cash Out: 

Preparing and Using Budgets

by

Charles Lamson

Many of us avoid budgeting like the plague. After all do you really want to know that 30 percent of your take-home pay is going to restaurant meals? Yet, preparing, analyzing, and monitoring your personal budget are essential steps for successful personal financial planning.

Once you define your short-term financial goals, you can prepare a cash budget for the coming year. Recall that a budget is a short-term financial planning report that helps you achieve your short-term financial goals. By taking the time to evaluate your current financial situation, spending patterns, and goals, you can develop a realistic budget consistent with your personal lifestyle, family situation, and values. A cash budget is a valuable money management tool that helps you:

1. Maintain the necessary information to monitor and control your finances
2. Decide how to allocate your income to reach your financial goals
3. Implement a system of disciplined spending---as opposed to just existing from one paycheck to the next
4. Reduce needless spending so you can increase the funds allocated to savings and investments
5. Achieve your long-term financial goals

Just as your goals change over your lifetime, so will your budget as your financial situation becomes more complex. Typically, the number of income and expense categories increases as you accumulate more assets and debts and have more family responsibilities. For example, the budget of a college student should be quite simple, with limited income from part-time jobs, parental contributions, and scholarships and grants. Expenses might include room and board, clothes, books, auto expenses, and entertainment. Once a student graduates and goes to work full time, his or her budget will include additional expenses, such as rent, insurance, work clothes, and commuting costs. Not until retirement can you expect this process to perhaps begin to simplify.

The Budgeting Process

Like the income and expense statement, a budget should be prepared on a cash basis, thus, we call this document a cash budget because it deals with estimated cash receipts and cash expenses, including savings and investments, that are expected to occur in the coming year. Because you receive and pay most bills monthly, you will probably want to estimate income as well as expenses on a monthly basis.

The cash budget preparation process has three stages: estimating income, estimating expenses, and finalizing the cash budget. When estimating income and expenses, you should take into account any anticipated changes in the cost of living and their impact on your budget components. If your income is fixed---not expected to change over the budgetary period---increases in various items of expense will probably cause the purchasing power of your income to deteriorate.Worksheet 1, "Annual Cash Budget by Month: An Excel Template," has separate sections to record your income and expenses and lists the most common categories for each.

Estimating Income

The first step in the cash budget preparation process is to estimate your income for the coming year. Include all income for the coming year: the take-home pay of both spouses, expected bonuses or commissions, pension or annuity income, and investment income---interest, dividend, rental, and asset (particularly security) sale income. When estimating income, keep in mind that any item you receive for which replacement is required is not considered income. For instance, loan proceeds are treated not as a source of income but as a liability for which scheduled repayments are required.

Note also that, unlike the income and expense statement, you should use take-home pay (rather than gross income) in the cash budget. Your cash budget focuses on those areas over which you have control---and most people effectively have limited control over things like taxes withheld, contributions to company insurance and pension plans, and the like. In effect, take-home pay represents the amount of disposable income you receive from your employer.

Estimating Expenses

 The second step in the cash budgeting process is by far the most difficult: preparing a schedule of estimated expenses for the coming year. This is usually done using actual expenses from previous years (as found on income and expense statements and in supporting information for those periods), along with predetermined short-term financial goals. Good financial records, as discussed in an earlier post, make it easier to develop realistic expense estimates. If you do not have past expense data, you could reexamine old checkbook registers and credit card statements to approximate expenses, or take a "needs approach" and attach dollar values to projected expenses. Pay close attention to expenses associated with medical disabilities, divorce and child support, and similar special circumstances.

Regardless of whether you have historical information, as you prepare your budget be aware of your expenditure patterns and how you spend money. After tracking your expenses over several months, you can study your spending habits to see if you are doing things that should be eliminated (like going to the ATM too often or using credit cards too freely).

You will probably find it easier to budget expenses if you group them into several general categories, rather than trying to estimate each item. Worksheet 1 provides an example of one such grouping scheme, patterned after the categories used in the income and expense statement.

Initially, your expense estimates should include the transactions necessary to achieve your short-term goals. You should also quantify any current or short-term contributions toward your long-term goals and schedule them into the budget. Equally important are scheduled additions to savings and investments, because planned savings should be high on everyone's list of goals. If your budget does not balance with all these items, you will have to make some adjustments in the final budget.

Base estimated expenses on current price levels and then increase them by a percentage that reflects the anticipated rate of inflation. For example, if you estimate the monthly food bill at $350 and expect 4 percent inflation, you should budget your monthly food expenditure at $364, $350 + $14 (4 percent X $350).

Do not forget an allowance for "fun money," which family members spend as they wish. This gives each person a degree of financial independence and helps provide a healthy family budget relationship.

Finalizing the Cash Budget

After you estimate income and expenses, finalize your budget by comparing projected income to projected expenses. Show the difference in the third section as a surplus or deficit. In a balanced budget, the total income for the year equals or exceeds total expenses. If you find that you have a deficit at year end, you will have to go back and adjust your expenses accordingly. If you have several months of large surpluses, you should be able to cover any shortfall in a later month. Budget preparation is complete once all monthly deficits are resolved and the total budget balances.

Admittedly, there is a lot of "number crunching" in personal cash budgeting. As mentioned earlier, personal planning software can greatly streamline the budget's preparation process.

Smart.sites Use the Family Budget Calculator at https://www.quicken.com/budget-calculator to compare how budgets vary by family type and area of the country.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 71-74*

END

Smart.sites

Use the Family Budget Calculator at https://www.quicken.com/budget-calculator to compare how budgets vary by family type and area of the country.

Personal Financial Planning: An "How-To" Guide (part 13)

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Tracking Financial Progress: 

Ratio Analysis

by

Charles Lamson

Each time you prepare your financial statements, you should analyze them to see how well you are doing in light of your financial goals. For example, with an income and expense statement, you can compare actual financial results with budgeted figures to make sure that your spending is under control. Likewise, comparing a set of financial plans with a balance sheet will reveal whether you are meeting your savings and investment goals, reducing your debt, or building up a retirement reserve. You can compare current performance with historical performance to find out if your financial situation is improving or getting worse.

Calculating certain financial ratios can help you evaluate your financial performance over time. Moreover, if you apply for a loan, the lender probably will look at these ratios to judge your ability to carry additional debt. Four important money management ratios are the (1) solvency ratio, (2) liquidity ratio, savings ratio, (3) savings ratio, and (4) debt service ratio. The first two are associated primarily with the balance sheet (Figure 1), while the last two relate primarily to the income and expense statement (Figure 2).

Figure 1 Personal balance sheet.

Balance Sheet Ratios

When evaluating your balance sheet, you should be most concerned with your net worth at a given point in time. You are technically insolvent when your total liabilities exceed your total assets---that is when you have a negative net worth. The solvency ratio shows, as a percentage, your degree of exposure to insolvency, or how much "cushion" you have as a protection against insolvency. 



Although the solvency ratio gives an indication of the potential to withstand financial problems, it does not deal directly with the ability to pay current debts. This issue is addressed with the liquidity ratio, which shows how long you could continue to pay current debts (any bills or charges that must be paid within 1 year) with existing liquid assets in the event of income loss.

The amount of liquid reserves will vary with your personal circumstances and "comfort level." Another useful liquidity guideline is to have a reserve fund equal to 3 to 6 months of after-tax income available to cover living expenses. If you feel that your job is secure or you have other potential sources of income, you may be comfortable with 3 or 4 months in reserve. If you tend to be very cautious financially, you may want to build a larger fund. In troubled economic times, you may want to keep 6 months or more of income in this fund as protection should you lose your job.

Financial Road Sign

Budgeting Basics Here are some helpful hints to get you going in preparing your budget. Be selective to avoid information overload; you don’t need to know everything. Set up a regular weekly time to read the key materials you select. Sort mail daily into a mail basket for each person, tossing obvious junk immediately. Do not procrastinate. Sort one pile at a time and take some action now. Do not make copies “just in case.” File only the essentials. Eighty percent of paper filed is rarely used. Purge files and other papers regularly to make room for new information. Give away recent magazines, catalogs, or books when they are still useful. Buy a shredder and use it to shred any paper with any personal identification and           account numbers, including unsolicited credit card offers. This will minimize           the risk of identity theft.

When evaluating your income and expense statement (Figure 2), you should be concerned with the bottom line, which shows the cash surplus (or deficit) resulting from the period's activities. You can release it to income by calculating a savings ratio, which is done most effectively with after-tax income.

Figure 2 Income and Expense Statement.

How much to save is a personal choice. Some families would plan much higher levels, particularly if they are saving to achieve an important goal, such as buying a home.

While maintaining an adequate level of savings is obviously important to personal financial planning, so is the ability to pay debts promptly. In fact, debt payments have a higher priority. The debt service ratio allows you to make sure you can comfortably meet your debt obligations. This ratio excludes current liabilities and considers only mortgage, installment, and personal loan obligations.



From a financial planning perspective, you should try to keep your debt service ratio somewhere under 35 percent or so, because that is generally viewed as a manageable level of debt---and, of course, the lower the debt service ratio, the easier it is to meet loan payments as they come due.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., LAWRENCE J. GITMAN, 2005, PGS. 68-71*

END

Financial Road Sign

Budgeting Basics

Here are some helpful hints to get you going in preparing your budget.

1. Be selective to avoid information overload; you don’t need to know everything.
2. Set up a regular weekly time to read the key materials you select.
3. Sort mail daily into a mail basket for each person, tossing obvious junk immediately.
4. Do not procrastinate. Sort one pile at a time and take some action now.
5. Do not make copies “just in case.”
6. File only the essentials. Eighty percent of paper filed is rarely used.
7. Purge files and other papers regularly to make room for new information.
8. Give away recent magazines, catalogs, or books when they are still useful.
9. Buy a shredder and use it to shred any paper with any personal identification and

          account numbers, including unsolicited credit card offers. This will minimize
          the risk of identity theft.

Personal Financial Planning: An "How-To" Guide (part 12)

Using Your Personal Financial Statements

by

Charles Lamson

Whether you are just starting out and have a minimal net worth or are further along the path toward achieving your goals, your balance sheet and income and expenses statement provide insight into your current financial status. You now have the information you need to examine your financial position, monitor your financial activities, and track the progress you are making toward achieving your financial goals. Let us now look at ways to help you to create better personal financial statements and analyze them to gain a more thorough understanding of your financial situation.

Keeping Good Records

Although recordkeeping does not rate high on most "to-do" lists, a good recordkeeping system helps you manage and control your personal financial affairs. With organized, up-to-date financial records, You will prepare more accurate personal financial statements and budgets, pay less to your tax preparer, not miss any tax deductions, and save on taxes when you sell a house or securities or withdraw retirement funds. Also, good records make it easier for a spouse or relative to manage your financial affairs in an emergency. To that end, you should prepare a comprehensive list of these records, their locations, and your key advisors (financial planner, banker, accountant, attorney, doctors) for family members.

Prepare your personal financial statements at least once each year, ideally when you draw up your budget. Many people update their financial statements every 3 or 6 months. You may want to keep a ledger, or financial record book to summarize all your financial transactions. The ledger has sections for assets, liabilities, sources of income, and expenses; these sections contain separate accounts for each item. Whenever any accounts change, make an appropriate ledger entry. 

Organizing Your Records

Your system does not have to be fancy to be effective. You will need a bank safe-deposit box, a ledger book, and a set of files with general categories, such as banking and credit cards, taxes, home, insurance, investments, and retirement accounts. An expandable file, with a dozen or so compartments for incoming bills, receipts, pay stubs, or anything you might need later, works well.

Start by taking an inventory. Make a list of everything you own and owe. Check it at least once a year to make sure it is up to date and to review your financial progress. Then record transactions manually in your ledger or with financial planning software. Exhibit 1 offers general guidelines for keeping and organizing your personal financial records.

You will want to set up separate files for tax planning records, with one for income (paycheck stubs, interest on savings accounts, and so on) and another for deductions, as well as for individual mutual fund and brokerage account records. Once you set up your files, be sure to go through them at least once a year and throw out unnecessary items.

Smart.sites Need help getting organized? You will find advice for every area of your life at www.organizedhome.com.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005,  LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 67-68*

END

Smart.sites

Need help getting organized? You will find advice for
every area of your life at www.organizedhome.com.

Personal Financial Planning: A "How-To" Guide (part 11)

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Preparing the Income and Expense Statement

by

Charles Lamson

As shown in Worksheet 2 (from last post and also below), the income and expense statement is dated to define the period covered. The steps to prepare the statement are:

1.  Record your income for all sources for the chosen period. Use your salary check stubs to verify your gross pay for the period, and be sure to include bonuses, commission checks, and overtime pay. You will find interest earned, securities bought and sold, interest and dividends received, and other investment matters on your bank and investment account statements. Keep a running list of other income sources, such as rents and tax refunds.
2. Establish meaningful expense categories. Those shown on Worksheet 2 provide a good starting point. Information on monthly house (or rent) payments, loan payments, and other fixed payments (such as insurance premiums and cable TV), is readily available from either the payment book or your checkbook (or, in the case of payroll deductions, your check stubs). (Note: Be careful with so-called adjustable rate loans, because the amount of monthly loan payments will change when the interest rate changes.)
3. Subtract total expenses from total income to get the cash surplus (a positive number) or deficit (a negative number). This "bottom line" summarizes the net cash flow resulting from your financial activities during the designated period.

Worksheet 2

You will probably pay for most major variable expenses by check, debit card, or credit card, so it is easy to keep track of them. It is more difficult to keep tabs on all the items in a month that you pay with cash, such as parking, lunches, movies, and incidentals. Most of us do not care to write down every little expense to the penny. You might try counting the cash in your wallet at the beginning of the month, then count again after a week goes by to see how much money is missing. Try to reconstruct in your mind what you spent during the week, and write it down on your calendar to the nearest $5. If you cannot remember, then try the exercise over shorter and shorter periods until you can.

Just as you show only the amounts of cash actually received as income, record only the amounts of money you actually pay out in cash as expenses. If you borrow to acquire an item, particularly an asset, include only the actual cash payment---purchase price minus amount borrowed---as an expense, as well as payments on the loan in the period you actually make them. You show credit purchases of this type as an asset and corresponding liability on the balance sheet. Record only the cash payments on loans, not the actual amounts of the loans themselves, on the income and expense statement.

For example, assume that you purchase a new car for $15,000 in September. You make a down payment of $3,000 and finance the remaining $12,000 with a 4-year 10.5 percent installment loan. Your September 30 income statement would show a cash expenditure of $3,000 and each subsequent monthly income statement would include your monthly loan payment of $307. Your September 30 balance sheet would show the car as an asset valued at $15,000 and the loan balance as a $12,000 long-term liability. The market value of the car and the loan balance would be adjusted on future balance sheets.

Finally, when developing your list of expenses for the year, remember to include the amount of income tax and Social Security taxes withheld from your paycheck, and any other payroll deductions, such as health insurance, savings plans, retirement, and pension contributions, and professional/union dues. These deductions (from gross wages, salaries, bonuses, and commissions) represent personal expenses, even if they do not involve the direct payment of cash.

You might be shocked when you make a list of what is taken out of your paycheck. Even if you are in a fairly low federal income tax bracket, your paycheck could easily be reduced by more than 25 percent for taxes alone. Your federal tax could be withheld at 15 percent, your state income tax could be withheld at 5 percent, and your Social Security tax could be withheld at 7 percent. This does not even include health and disability insurance.

Preparing income and expense statements can involve a lot of number crunching. Fortunately, a number of good company software packages, such as Quicken and Microsoft Money, can simplify the job of preparing personal financial statements and performing other personal financial planning tasks.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 65-66*

END