She first asked me what my hunch was where this family should begin to cut back. I had mentioned that without a complete picture it is difficult to advise or even guess, especially regarding more complicated areas like the medical insurance and co-pays. That said, I do believe that many families spend more than they need to on clothing, food, and other basic commodities.
Another overlooked area, often addressed by financial columnists is childcare. Childcare is simply an overwhelming expense for families. It is well worth evaluating various types of care to see if there is a less expensive way to provide the car needed. I know families who have worked out different work schedules to make this accommodation. At $400 a week shared between two families, I have to wonder if there is not another arrangement that can provide the hours needed for less.
Utilities in old homes are expensive. A poster suggested solar. Another suggested replacing appliances with more energy efficient appliances. I will warn people that often the benefit is overblown. I'm favorable to saving up cash to pay for newer appliances. I would not start with something big like windows. The payback period is long and I think it is often overblown. I would start (cash in hand) with smaller things like moving to energy efficient lightbulbs which can be had on nearly full rebates from time to time or even replacing a washing machine. Our own washing machine, replaced about 5 years ago, has paid for itself twice over I'd estimate. The other bonus is that it holds more laundry, saving us time and physical energy. When it comes to bigger systems, yes, they can pay for themselves, but I would not jump on whatever trend is out there in hopes of saving, especially when you don't have the funds to "invest." Stick to the smaller efforts and don't underestimate old fashioned things like turning the heat down a few notches and turning off lights.
And now for the real meat of the post: queen bee asks about this advice and if it is legit.
Another route we tried that didn't work for us but may work for you, from the advice of an accountant, is to ask your employers to make you a type of employee that is essentially self employed (I forget the name) it can be applied to certain professions like someone who sells life insurance. That allows for greater tax write offs. Or perhaps registering a company that operates out of your home, even if it makes the minimum allotted amount would give you other kind of tax write offs on your home expenses. Perhaps worth it to speak to an accountant.
A statutory employee is a very specific type of employee and chances are you aren't one! And if you do happen to be one (Do you pick up and deliver laundry? Do you distribute beverages, but not milk? Are you a full time life insurance sales agent working primarily for a single company?), there is a good chance that the business owner's accountant has put a good amount of time into worker classification on your behalf.
The classification of contractor vs. employee depends on three main factors: Behavioral Control, Financial Control, and Relationship Type. There are fairly severe penalties for misclassification. An employer retains the right to control how work is performed. An employee is generally paid a regular, fixed wage whereas a contractor is paid by the project and is employed on an as-needed basis (for professional services, the contractor is customarily paid hourly for the project). The relationship type between an employee and a contractor is significantly different and therein lies the rub.
I tend to have a bad feeling when an employee (and even their own personal accountant perhaps) start to agitate over how they can save some tax dollars by doing this or that to their employment status. Maybe there is an advantage to being a contractor, thinks the employee who sees his businessman neighbor pull up in a leased car for business? Hey, I want to be able to write off my car lease he thinks! And I'd love to be able to write off my IPhone and data plan. And wouldn't it be great to be able to write off those wedding gifts this wedding season?
In certain instances, an employer can convert a regular employee into a contractor. Perhaps an employer even has an incentive to convert an inquiring employee into a contractor because of the onerous legal regulations for larger employers and your inquiry will be very welcome. It might be very tempting to become a contractor because contractors are often paid more for their work (often to make up for the additional employment taxes they will incur as a contractor, but also for their own investment in equipment, etc).
That said, a contractor is far different than an employee and when you become a contractor, even if it is an "arrangement" you really are a contractor and should expect to be treated as one. Understanding your new status is key.. One of the determining factors between an employee and a contractor is the intent of the relationship and its (implied) permanency.
An employee is generally someone you employ and expect to have a continuing, ongoing relationship with and an investment in. An employer has little investment in a contractor beyond the work they are contracted to do. An employer will generally expect the contractor to know it or figure it out. Continuing education: your responsibility. Professional development: your responsibility. I've had plenty of interaction with contractors (and contracted companies) and contractors are expected to perform and produce or the relationship will come under question fairly quickly. Employees are also, of course, expected to perform, but there is a different type of investment in an employee and given the closer proximity a different type of investment. An employee that maybe isn't strong in this or that area, might be moved over to a different department. An employee with some time on their hands might be asked to try something new or experimental that could prove very successful. The contractor doesn't usually have the same proximity as an employee and isn't operating in the same day-to-day work environment.
Get hurt on the job? You aren't covered by workman's comp. Get laid off? Well, you don't really lay off contractors, you just don't take them on for new projects and no, you aren't covered by unemployment insurance. Company decides to award a bonus or open up a certain benefit program like pre-tax transportation dollars? Well, you don't get benefits. Worse yet, you are an accounts payable so get in line for payment. Did the employer not like the result of your project or find a defect in the work? You might be fighting this one out in court, unpaid. Severance pay? Maternity Leave? LOL in text-speak.
I certainly would not discourage a person who has great services to offer the world to go out there and make their way b'hatzlacha. But I would not turn in an employer-employee relationship with good potential and with the many legal protections it provides-a window seat into an industry-for a seat outside the window in exchange for some deductible mileage or a home office deduction. And, by the way, many successful business owners/contractors got where they did by being employees. Don't walk from industry too early for a tax deduction alone!
Regarding the idea of registering a company that operates out of your home for the tax deduction, is that legit? Let's take a step back. A person may take certain business expenses when running a business. What is a business? In short, something that you are engaging in with the intention of turning a profit. Merely "registering a company" that operates out of your home does not a business make. If you want to take a home office deduction, you need a home office. If you want certain write offs, you need certain current profitability. You also are walking a fine line if you are finding something to call a business that could be considered a hobby and are taking losses. So, the advice gives me pause.
Decreasing taxes does not the bottom line make. Ultimately, when a person runs around with this idea and that idea to save themselves some money, they are using their energy and their time and that investment should be profitable. So the question for a family in financial distress should not be how much can I decrease my taxes, but how can I significantly improve my current situation and my long term situation? If starting a business is a viable pathway, great. If not, don't bother upshlugging the Internal Revenue Code. Look towards other investments for your time.
Lastly, queen bee asks my opinion regarding the wealthy amother's following assertion:
the way to build wealth is through entrepreneurship rather than having a job, and she's a big believer in taking financial risks.
There is no one path to wealth except discipline. You must spend less than you earn. You must continue to spend less than you earn for many, many years on end. You must balance risk with common sense and discipline. And you must have a long term financial outlook. The amother from that thread struck me as someone with "new money." She criticized the Dave Ramsey conservatism, believing him too risk adverse. Her risk has paid off for her in the present. That doesn't eliminate the accumulated data on business failure which is a highly interesting study. Nor do we know if she could have got where she is with less risk. And, by the by, one reason why start up businesses often fail: lack of financial responsibility and awareness. So even where you take risk, you eventually need to turn the corner towards conservatism for the long term.
So that is my take, queen bee, happy you asked.
20 comments:
This is all great advice. About replacing big ticket items with the hopes of saving energy, I agree that many such improvements don't pay for themselves except in the very long term, think 20 years or more. However, we converted our oil heat to gas recently and we expect the payoff period to be short. We looked not just at current oil and gas prices but at longer term trends. The price differential and projected trend was too much to just ignore.
Interesting. I've never lived in a home with oil heat, so you are the expert.
How much did it cost to convert oil to gas, as we have the same issue?
It depends on the complexity of your heating system. Figure $5K-10K, not including the cost of removing an underground oil tank.
In terms of where to cut back, sure you could cut back a bit on food or clothing, but I imagine it's the rare family where the amount of overspending in those areas, if cut back, would put a family living on the edge back on to solid financial footing. I think it's like I said in a comment on the previous post: sometimes you find yourself in a situation where nothing is going to get dramatically better if you make small changes; you either get used to living like that or you do something big. You can't just cut back $100 here and $50 there and expect significant results. The families who are struggling have fundamental issues that minor cuts here or there are not going to fix. The families didn't get into trouble because they had red meat too many times a week and so cutting that out isn't going to fix anything. They likely got into trouble from some combination of being underemployed, having student loan debt, credit card debt, too high a mortgage, living in a high cost area, having kids too young, private schooling (yeshiva), and letting the problem fester instead of addressing it early. When that is the situation, you either suck it up and be as happy as you can with your lot in life or you make a radical change.
Where I am, $400 a week for one family is very cheap for young children.
Efficiency upgrades are often a scam in the sense that it often takes years (often on the order of decades) to recoup the "investment." New windows are notorious for this. Usually the stuff being most advertised as the worst ROI. Spending an extra $1000 on a high efficiency model to save $10 a month on electricity is ludicrous. CFLs are a good investment (especially if you leave lights on all Shabbos). Air sealing is often a good investment. But, like you said, adjusting the thermostat (and having a programmable one) is well worth it.
Again, though, it's not gonna turn anyone's situation around.
As for the contractor route, people asking about this usually haven't the first idea about accounting or business principles. Even if legal it's likely a terrible option. You can't write something off unless you have income to write it off against. People think "write off" is the same as a credit or something. It's another scam like Mary Kay that I see people get mixed up with.
As for entrepreneurship versus being an employee, it's the old adage that risk is commensurate with reward. The woman in the post said she and her husband took out over $100k on their credit cards to start their business. You can imagine how that could have ended up. The only surefire way I know of to make a lot of money is to be very talented, work really hard, and constantly reevaluate whether your hard work and talents are being compensated adequately and if not try to move up somewhere else.
Anon 12:54 -
The cost may also depend on exterior work. For example while there is a gas line on our street, it does not run to our house. That means digging up the street and our front yard or driveway to bring the line to the house. Every time we looked into converting we got very high estimates from the town for what we would have to pay for the road repair, and sometimes the town said we could not do it at all because the road was within 3 years of being repaved. Sometimes gas companies will pay some of the cost of bringing the line to the house if they are trying to attract customers, but not always.
JS: I agree with you, in part. There are some people who do spend so much on little extras or conveniences that it really does add up. I also agree that 400/week for child care is not high in many areas. The Boston Globe just ran an article stating that in this area, teens are gettin 15/hour for babysitting and the going rate for responsible, mature babysitters is closer to 20/hour.
I also agree that sometimes big changes are needed. One big problem this family has is that it appears that neither parent has a job with health insurance. Maybe they should suck it up for a year or two and move into grandma's basement or do something extreme so one parent can go back to school so he/she can get a better job. Maybe one needs to work a night shift so they don't have to pay for child care, etc. You can survive almost anything extreme for a few years.
Thanks Anon 6:36 for making this good point. We did not have to pay extra for a gas line since there was already a gas line with capacity on our street.
Anon 6:42: It appears they have health insurance coverage from an employer, but it is not free. Most employers who offer health insurance do charge the employee a percentage of the costs ("cost sharing"). This percentage is increasing. Still, private health insurance would be much more expensive.
Tesyaa: I read the post as the family paying $1200/month for health insurance. That sounds extremely very high for an employer-sponsored plan which suggests either there is no employer coverage or its a low wage super bad employer plan, like what you would expect from Walmart. I understand that even when employers provide health insurance, the employee has to pay a percent, but I've never heard of the percentage being higher than 25 -30% unless the employee is part time.
A lot of the general problem people have when they are in financial stress is that they, themselves, cannot articulate what they are paying for, what they aren't etc.
I also figured it was an individually contracted plan. The poster stated provided by the employer. Perhaps it is an individual plan that the employer reimburses for up to a certain amount as a benefit and so it is "both" in a sense.
$1200 a month is a little high. At a big employer, family coverage can easily be $800 a month. $1200 sounds way too low for private coverage. Maybe $1200 is the monthly total of both the employee's share of premiums plus out-of-pocket unreimbursed costs.
How much do you think privately paid coverage for a family would cost?
My family coverage is $550/mo for a high deductible plan. so if I have a lot of health expenses in a year, I can run up about 6k/person up to 12k/family but in a typical year we probably spend $8k or $9k for medical, all in, but that still keeps me in the $1200/mo range, but Florida doesn't have community rating yet... In states withut community rating, private insurance is CHEAPER than group plans, because they don't take already sick people into them. In states with must cover and community rating, big group plans are cheaper. Not sure if my existing plan will survive the move to exchanges or what, but Florida not adopting a state exchange may or may not help.
In terms of "extras" -- when we did some belt tightening, we were able to cut $1000/mo of little things. Moving from -$500/mo to +$500/mo was the difference between sinking further and further in debt and climbing out. Once you get positive, then each additional earned dollar makes a BIG difference... go from +$500 to +$1000 and you double your rate of improvement. Honestly, behavioral modification matters, A LOT. As Dave Ramsey points out, financial freedom is 90% emotional 10% math, the math is easy, we can all do it. If math skills made for good finances, we'd all be in good shape.
In terms of getting write-offs, there is a solution that is VERY common in Florida, but less so up north. If you can moonlight, moonlight, ideally do it inside an S-corporation to avoid audit flags (business deductions make the IRS suspicious). If you have $500 in monthly expenses that you "wish you could write off" -- try to start a business that makes $600/mo. The first $500 will be tax free (since now you can write off those expenses), and as long as you make a profit, the IRS really isn't likely to reclassify it as a hobby (you need to make a profit in 3 years out of 5, if you make a profit annually, you should be okay).
The IRS doesn't like when rich people take up expensive hobbies like pottery and buy a ton of equipment and call it a business that loses money. However, if you have a side business, and that side business breaks even/makes a small profit, but pays for your business phone (cell phone), Internet connection, and home office computer, you're likely to be okay.
You can collect two W-2s and 1 (or more) K-1s, and your businesses can have expenses that are taken on the 1120S. Either get familiar with Turbo Tax or an affordable accountant, but you CAN write off the business expenses of the tax return, and adding a K-1 to your personal return doesn't make it any more complicated.
Thanks for the interesting feedback! I wish I had read something like this blog 25 years ago.
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