Posts Tagged ‘spending’

Where Did The Money Come From?

paying taxesThe Congressional Budget Office (CBO) released their preliminary estimate of the monthly budget deficit for January.  The CBO estimated the government overspent by a measly $2 billion in January 2013. This compares to a monthly deficit of $27 billion in January 2012.

Hold on before you think we’re making much progress towards reducing the $1 trillion plus deficits of the past four years.  This was only one month out of twelve.  The CBO estimates the cumulative deficit for the past four months is $295 billion (the U.S. fiscal year starts on October 1), and the Fiscal 2013 total deficit is projected to be $850 billion.

The CBO reported a $36 billion uptick in revenues collected in January 2013 over those collected in January 2012.  Some politicians and pundits are already citing these numbers as being indicative of the success of the increased taxes, which were part of the fiscal cliff deal reached on January 1, 2013. It’s a stretch to make this claim, but that rarely matters in the world of politics.

The CBO estimated the government collected $9 billion more in Social Security taxes.  These additional taxes arose from the additional Social Security taxes collected after January 1, 2013.  The 2% temporary tax holiday was scheduled to expire December 31, 2012, and further extension was never a serious consideration.  Social Security is already headed towards insolvency, and continuing a reduced rate would have only exacerbated the problem.  It’s a stretch, but since Congress could have extended the lower rate, you could make the argument these additional revenues were part of the fiscal cliff deal.

Although the remaining additional $27 billion may have been collected in 2013, most of it is not attributable to the fiscal cliff deal.  The increased tax rates only affected high income individuals on income earned after January 1, 2013.  Most super wealthy people pay their taxes through estimates, not withholdings, and the first quarterly payment is not due until April 15th.  Thus, the first real increase in revenue from the higher 2013 taxes won’t be collected by the Treasury until April 2013.

So where did the money come from?  In all likelihood, most of it was additional 2012 taxes which were paid in 2013.  Quarterly estimated taxes for individuals are due April 15th, June 15th, September 15th and January 15th of the following year.  Based on my experience, most wealthy people pay their fourth quarter installment in January of the following year.  Odds are that most of the additional $27 billion in tax revenues actually relates to taxes paid for 2012, not the increased taxes due for 2013.  It’s a reasonable conclusion, since many high income taxpayers accelerated income into 2012 to avoid the anticipated higher 2013 tax rates.

The additional revenues may be good for the country and the economy.  However, I think it’s a little too early to declare success and victory from the increased tax rates.  I believe the verdict is still out, but to make a fair assessment, you have to understand where the money comes from.

Can credit card debt management help you to save dollars?

People in this part of the world are used to using credit cards rather than cash for their day-to-day expenses. The proportion of credit use is far more than their retirement savings. Credit cards have given them immense portability and convenience to make frequent purchases. However, this has given rise to several financial diseases which is affecting the fragile US economy. One of the major setbacks is the accumulation of credit card debt. This makes it imperative for the people to know the ways of credit card debt management to avoid getting into a financially sticky situation.

The ways of credit card management

Here are few methods of reduce credit card debt as well as save dollars:

  1. Transfer your credit card balances – This means transferring all your multiple credit card balances into a zero interest credit card. This may be for a year or so as offered by the credit card company. This creates a great opportunity to clear out all your outstanding bills within the promotional period. In this process, you’ll be paying for the principal balance and not for the interest. However, there is a transfer fee for this procedure which hovers around 3-5% of the balance amount. By this method, you’ll save a lot of money even after paying the transfer fee.
  1. Create a budget: Start developing the habit of spending less. Vow to start living a frugal life. This is because the more you spend on useless things, the less you save. Therefore, to fight back such irresponsible behavior, plan a budget that will be comfortable for you to follow. Keep in mind that this budget should not become a burden for you; instead it should motivate you to spend smartly and save money for the rainy day. Use those savings towards debt repayment and you’ll see a remarkable decrease in the number of outstanding bills.
  1. Lower your interest rates: This is one of the most effective steps in the credit card debt management plan. Be vigilant and do your market research to learn about the recent market offers which various creditors are making. After a getting a thorough knowledge of the market offers, contact your current creditors. Request them to lower your card’s interest rate. The creditors will welcome this sort of gesture from you and will readily oblige. If you’ve been a good customer who has been punctual in making the payments, then the creditors will surely consider your request.

During the negotiation phase with your creditors, tell them that you are considering balance transfer as an alternative to lowering the interest rate. This will give them the necessary nudge to accept your terms.


This article was written by Grace Ruskin.  Grace is a financial writer and is associated with DebtCC Community.

Can Congress Cut Spending?

As part of their Pledge to America, Republicans promised to cut $100 billion of federal spending in the first year they were in office.  With the Republicans regaining majority control in the House of Representatives, the pressure is on for them to act.

Let’s take a little look beyond the political rhetoric and consider some of the facts.

  • Congress has yet to pass the 2011 budget, so the government continues operating based upon the 2010 budget.
  • Total federal spending for FY 2010 (October 1, 2009 – September 30, 2010) was $3.55 trillion.
  • Mandatory spending (i.e., Social Security, Medicare, debt service) was $2.184 trillion, defense spending was $664 billion and all other discretionary spending was $702 billion.
  • The deficit for fiscal 2010 was $1.42 trillion.

When you look at federal spending of $3.55 trillion, $100 billion is approximately 2.8% of the total.  It’s hard to argue that a 2.8% reduction in expenditures is a draconian cut.  However, opponents of the cuts have a valid reason to be concerned. 

When Congress talks about cutting spending, they usually are referring to non-defense discretionary spending, which is only about 20% of all federal outlays.  When you look to trim $100 billion from $702 billion of spending, the cuts are far more dramatic, so it’s understandable why the recipients of these funds are concerned.  Furthermore, this is the area of the budget that directly impacts the various constituents of a particular Member of Congress, which is one of the reasons it’s so difficult to enact spending cuts.  Everyone is trying to protect their turf.

Irrespective of these issues, I believe that Congress has to cut spending.  When you look at the numbers, there is simply no way that the government can raise sufficient revenue to balance the budget, nor can it continue to overspend in excess of $1 trillion each year.  At the current rate of spending, the total federal debt is projected to be near $20 trillion by the end of 2015, and will continue climbing ad infinitum.  It doesn’t take a genius to realize it is unsustainable.

I’m also of the opinion that this is a test of Congress’ true mettle and ability to deal with our fiscal crisis (yes… I’ll call it a crisis).  On the big picture, if Congress can’t trim $100 billion from nearly $3.6 trillion of spending, something is wrong.  That’s less than 3% of the total pie.  It’s also less than 10% of what would be needed to balance the budget.

Given the political dynamics of Washington, the burden doesn’t rest solely with the Republicans. President Obama and the Democratically controlled Senate also need to be part of the process.  Both parties contributed to the debt and excess spending, and both need to be part of the solution.

Without doubt, it’s going to be a difficult and painful process.  Just like your personal finances, it’s easier to increase spending than reduce it, but if necessary, you do it.  For me, a $100 billion spending cut is the beginning and not the end.  They will need to reduce spending by much more to solve our fiscal crisis, but you have to start somewhere.  Time will tell if Congress really can reduce spending.

The Gift-Giving Season

Christmas is the gift-giving season.  There is a lot of emphasis to buy gifts for other people.  Not only are you expected to buy a gift, but there is a lot of pressure to buy the right gift.

If a gift is an expression of your love, adoration and appreciation, does it matter what gift you give?  Yes… and no.

A gift will communicate your feelings if it has special meaning to the recipient.  The best gifts are those that are unique to the person receiving them.  It doesn’t necessarily have to be expensive or extravagant.  Sometimes a simple or hand-made gift can communicate your feelings much more than something that costs a lot of money.  Therefore, the right gift is the one that has signficant meaning rather than a high price tag.

This is an important principle to remember when purchasing gifts, especially for Christmas.  Our culture places a tremendous value upon the type of gifts you give.  Love, appreciation, and status are often measured by the gifts you purchase.  Consequently, there is a lot of pressure to overspend at Christmas, especially by parents.  You may want your children to have a memorable Christmas; or you want them to have a better life than you did; or worse, you’re trying to buy their affection by lavishing them with gifts.

There is nothing wrong with giving your children many things or showering them with gifts, but there is a problem if you’re buying gifts you can’t afford.  Far better for you to find less expensive but more meaningful gifts, than try to create an extravagant Christmas that takes months or years to pay off.  

Gifts rarely make lasting impressions and memories.  Sure there may be one or two gifts you’ll remember forever, but most of them are quickly forgotten or replaced.  Also, the more someone has, the less likely that any one thing has much meaning.  Upon reflection, I can only think of very few gifts I received at Christmas that really helped define a great Christmas.  My best memories are family traditions and spending time with people.  I may be a little unique in this regard, but I doubt it.

Christmas is a season of giving.  It’s good to give presents and material items, if given with the right heart and for the right reason.  The appropriate gift can communicate your love, adoration, appreciation and respect for another person.  At the same time, make sure that you can afford what you’re buying.  Feelings of regret and animosity can easily replace love and affection when you buy things you can’t afford.  Besides… it’s a foolish financial decision.

Giving gifts is an important part of Christmas, but there are more important things than material gifts.  The gift of love, time and traditions will probably make much more of an impact on your family and friends than the things you buy.  You may find that the best gifts don’t cost much.

Christmas is the gift-giving season.  Bless others with your generosity and gifts… both those that cost money and those that money can’t buy.

Fiscal Austerity: Easier Said than Done

Although there is still a lot of political posturing and wrangling to be done, it appears that a deal has been made regarding the extension of the Bush tax cuts.  Like most Washington deals, it’s a compromise where all sides get to claim victory. 

Here is a quick summary of the major points of the plan:

  • 2-year extension of all current tax rates
  • Reinstatement of the Estate Tax for estates in excess of $5 million
  • Extension of unemployment  benefits for an additional 13 months
  • Reduction in the employee’s portion of Social Security taxes of 2% for one year
  • Extension of several expiring tax provisions

The price-tag of this bill: $800 billion – all of which will be funded by additional U.S. debt.

There are arguments to be made for the economic and social benefits of each of the provisions.  However, while the machinations may be different, there is still an overriding principle to consider… Congress continues to spend money it doesn’t have.  While many people oppose various elements of the agreed framework, all of the politicians and economists I have heard comment on this matter support deficit-spending of some sort. 

The sluggish economy, the rapid expansion of government spending and national debt were hot issues during the recent 2010 elections. Candidates made promises of fiscal restraint and austerity.  There was a lot of drum-beating and chest-thumping over the debt and deficit and many promises to reign in government spending. 

It’s interesting how quickly Washington returns to business as usual, or remains oblivious to the wishes of the voters.  Granted, many of the new elected officials have yet to take office, but the recent tax legislation is a clear example of the challenge that lies ahead.  However, the stark reality is that fiscal austerity measures are easier said than done.  As this article in The Economist points out, President Obama and Congress have punted on fiscal austerity once again. 

The progress of the lame-duck session of Congress is a good indication that we should not expect to see a dramatic shift in the way Washington works or spends money.  Political posturing continues to take precedence over what’s best for the country. Furthermore, when faced with the choice between making tough financial decisions and pandering to certain constituencies, fiscal responsibility loses every time.

Whether anyone wants to admit it or not, hard decisions will eventually be required.  You only need to look to the recent events in Greece, Ireland, Spain and Portugal to realize that sooner or later a nation must put its fiscal house in order.  As these countries and their citizens have discovered, it won’t be pleasant, but you can’t continue to spend more than you take in forever.

Fiscal Austerity is easier said than done.  It’s also easier if it’s tackled sooner than later.  At this point, I’m not sure we can count on either.

Budget Basics #10 – Creating Margin

In business and financial terms, margin is typically defined as the difference between income and expenses.  For your personal finances, it can be thought of living below your means.

It’s easy to look at someone who is successful and wealthy and think that they are successful because they never have problems.  The reality is that sooner or later, every person and business will experience struggles and challenges.  Success is often the result of surviving problems, not the absence of problems.

There are cycles to the economy and to most businesses.  Success comes to those who can persevere through the downturns and hold on until things get better.  Margin helps to buy you time until things improve, and it gives you flexibility to make adjustments to handle your situation.

Like many people, I had a lot of margin a couple of years ago.  I was giving away nearly 30% of my income; taxes consumed another 25-30%; and I saved/invested another 10%.  As a result, I was living on about 30-40% of what I made.  Within a matter of months, things changed dramatically.

In addition to the economic recession, Lady M and I decided to relocate from Vermont to the great State of Texas.  Within a six-month period of time, we went from three sources of income to one.  Including employer-provided benefits, our income dropped by about 45% in a matter of months.  Having margin allowed us to make that move.

We had to make some adjustments in our giving, savings and spending to reflect the reduction in our income.  Too bad we couldn’t adjust our taxes as well.  Our margin shrunk, but thankfully, we have weathered the storm so far.  We are working towards increasing our income, expanding our margin and restoring our level of giving. It’s taking time, but we’ll get there.

How big of a margin should you have?  There is no universal formula.  It all depends upon your income, lifestyle and ability to make changes.  Margin is a lot like an emergency fund.  It won’t solve all problems or keep you from experiencing challenges, but it will increase the likelihood you will survive a challenge when it arises.

Want a few tips on how to create margin.  Here are a couple of articles you can read which may give you a few ideas.

18 Means for Living Below Your Means by Mark and Angel Hack Life.

10 Smartest Ways to Live Beneath Your Means by Dumb Little Man.

Budget Basics #8 – Ways to Cut Your Spending

I have had the pleasure of living with more money, and the joy of living with less.  I will tell you that it’s always easier to spend more than less.  No matter how much money you make, it’s difficult to ratchet back your lifestyle.

Your motivation for cutting your spending may be voluntary (you’re saving for something big) or forced (you lost your job).  No matter the reason, accept that there is no magic formula or simple solution to cutting your spending.  Your success will depend upon your willingness and ability to exercise self-control and discipline.

The following are a few principles and techniques that you may find helpful.

  • Cash – Generally, you will spend less money if you pay cash.  You can also implement an envelope system Dave Ramsey highly recommends.  Basically, you put cash in various envelopes for each type of expense and only spend what’s in the envelope.  For instance if you have a clothing envelope, you only buy clothes with the allocated cash.  When the cash is gone, you stop buying. 
  • Cheaper Options – Review your budget to see how you might maintain a type of service, but use a cheaper option.  Cable tv and cell phones are good examples.  Do you really need the DVR, movie channels or the unlimited data plan?  Eliminating options and extra services can cut your bill by 25-50%.  Having all the bells and whistles may be nice, but it may not be worth the added expense.
  • Cutbacks – Rather than completely eliminating expenditures, reduce the frequency.  Entertainment is a great example.  You can still go to the movies or eat out; just don’t do it as often.  Go once a month, rather than once a week.  You may be able to really curtail your spending if you cutback the frequency and select a cheaper option.
  • Eliminate – Completely eliminating an expense can be the hardest thing to do.  Unless you like to throw away money, you obviously had a reason for spending the money in the first place.  It can be difficult to let something go.  Acknowledge the sacrifice you are making, but keep in mind that’s it’s less important than one of your higher priorities (like paying your mortgage).

No doubt, curtailing your spending is hard.  Changing behaviors and sacrifice is never easy.  You may not get it right every time, but don’t give up… and don’t keep overspending.  It may take a little while, but you can control and cut your spending if you remain focused and diligent.

Hint: Stay more focused on what you are going to gain by cutting your spending than what you are losing.  It will be much more difficult if you are constantly thinking about what you can’t have or can’t do.  Far better for you to think about what you’re going to achieve.  It will be your reward for trimming your spending and managing your money well.

Budget Basics #7 – Gaining Control of Your Spending

A budget doesn’t control your spending.  Only you can do that.  If used correctly, a budget can help guide your spending, but it’s your choice where the dollars flow.

There are things you need to purchase and money you must spend that is completely beyond your control.  You don’t voluntarily choose for a child to get sick or the washing machine to break down.  However, most of your spending decisions are a personal choice.

The way you gain control of your spending is to change the process you use to spend money. It also happens to be the most difficult, because it involves changing your behavior. 

I contend that you lie the loudest and most often when you lie to yourself.   Your ability to control your spending will be dependent upon your willingness to be honest with yourself, and if you’re married, to be honest with your spouse.  An honest assessment about your priorities, preferences, habits and personality are all important.

  • Priorities – You need to prioritize what’s most important to you.  Is it a car, vacation, house, jewelry, clothes, saving for retirement, etc?  You may not have it all, but you can have some of it if you are willing to forego certain items in order to save/spend for something else.
  • Preferences – Generic vs. name brands is a common choice with food and clothing.  I agree that there can be a difference in quality, but you have to decide if it’s worth the extra money you pay for a particular brand or label. 
  • Habits – Excluding major purchases, you probably have a lot of spending habits.  Are you a comparison shopper, or do you choose the first item you see or whatever has the coolest looking package?  Are you always crunched for time, so you eat out rather than packing a lunch or have take-out instead of cooking?  Changing habits can be difficult, but it can be the key to freeing up money for something that’s a higher priority.
  • Personality –If you’re impulsive, you may tend to buy on the spot, and maybe regret it later.  Feeling a little down… how about some retail therapy to lift your spirits?  Your personality affects the way you spend money.  The more you understand yourself, the better you will be able to identify and avoid situations where you are not making good financial decisions.

The discussions Lady M and I have about finances involve these topics.  We don’t get into the, “you spent how much on what” type discussions.  Communication is the key for us coming to agreement in how we prioritize and control our spending. 

I am a high pressure salesperson’s nightmare, because I do not make any major purchase on the spot.  I’m an analytical person, so I need time to think it through.  The worst financial decisions I have made came when I had to make a quick decision.  You know the line… buy it now or you may lose out.  I operate under the philosophy that if it’s gone when I come back, then it wasn’t meant to be.

Lady M is a lot more spontaneous than I am. She also has a real affinity for designer items.  Before I met her, I had no idea who Louis Vuitton, Kate Spade, and David Yurman were.  I might not see a difference between a $50 handbag and a $500 one, but she does.  If it’s important to her, then it becomes important to me, and to our budget.

 We have worked to understand and adjust for our differences.  Lady M knows that we won’t buy a car the first time we go to a dealership.  I know that our travels and vacations will include shopping (and sometimes buying) handbags and jewelry. 

By being honest with ourselves and each other about our priorities, preferences, habits and personalities, we have modified our behaviors to collectively control our spending, so we both win.  You may find these may be the key to controlling your spending as well.

The Size of the Current U.S. Deficit

Although the terms are often used interchangeably, the deficit is different from the total debt.  The deficit is the amount of money the government spends in excess of the taxes and fees it collects in one year.  The debt is the cumulative amount of money borrowed by the government.

The White House released its revised estimate of the deficit for the fiscal year ending September 30, 2010; it’s $1.47 trillion.  The good news is that the deficit is projected to be $84 billion less than the amount estimated in February.  The bad news is that government receipts are expected to be down by $33 billion.  Irrespective of the final amounts, this is a gargantuan amount.

I admit that have difficulty fully grasping the difference of the illions (i.e., billions and trillions).  A $1.47 trillion deficit is almost unfathomable.

Let me try to make a few points to illustrate the magnitude of this problem.

  1. The 2010 census is still underway, but it’s estimated that the current U.S. population is 310 million.  Divided up equally amongst every person in the U.S., the government will borrow $4,742 for every single person this year.  Looked at another way, they are overspending $13 for each person every day.
  2. Total federal spending is about $3.6 trillion.  Over one-third of it is deficit spending.   Therefore, the government is borrowing $1 of every $3 it spends.
  3. The total taxes collected by the government in fiscal year 2009 was $2.1 trillion. Across the board, taxes would have to increase by 70% to break even.
  4. The current US debt is $13.25 trillion and will be ready to crest $14 trillion by the end of 2010. It total receipts are $2.1 trillion, it would take over 7 years to pay off the debt (including interest) if the government shut down and spent no more money.

I understand the significance of the deficit is difficult to fully comprehend, but we can no longer afford to ignore it.   My purpose with these articles is to raise awareness and hope people will step back and say enough is enough… something has to change.  Change has to start with you and I.

Don’t count on politicians to voluntarily tackle this problem; they created it.  Politicians always care the most about one thing… reelection, and the current system helps secure that goal. Cutting benefits, eliminating programs and raising taxes alienates constituents.  The survival nature of politicians means they will defer or avoid decisions that may cost them votes.  They will only make the tough choices and changes when voters are more upset with their inaction than with their actions. For years, politicians preached fiscal restraint, yet continued to support deficit spending.  It’s time for deeds to match words.

Keep in mind there are no simple solutions.  If it was easy, it would already be done.  We can’t cut our spending enough to balance the budget without significantly disrupting the programs and services we continue to expect and enjoy.  Alternatively, raising taxes or expecting to grow our way out of this deficit is not realistic either.

While I don’t have the answer, I believe the solution will be innovative, transformative and maybe even divine.

The illions – What is a million, billion, trillion?

Politicians, newscasters, business people, and citizens frequently speak of millions, billions and trillions of dollars.  These terms have become such a part of our daily vernacular that it seems we no longer have grasp of the vast magnitude of the difference between these amounts.

For most of us, $1 million is still a lot of money.  According to the US Census Bureau, the median household income in 2007 was $50,223.  Thus, it will take a person/couple 20 years to earn $1 million.  If you are fortunate to be in the top 2% of all households, you earn at least $250,000 each year.  Assuming a 40-year work life, 50% of all households will earn less than $2 million in their lifetime, and 98% will earn less than $10 million, before taxes.

There was a day when you were rich if you had a net worth of $1 million.  Although $1 million may not be worth what it used to be, it’s still a lot of money.  In 2004, 90% of all US households had a net worth of less than $400,000, and given the recent economic turmoil, this probably hasn’t risen much in the past six years.  You may have a lifestyle that is well above average, but you won’t be living a life of the rich and famous with $1 million.

By simple math, a billion is 1,000 million. It would take you 20,000 years to earn $1 billion if you earn $50,000 per year.  If you had a $1 billion, and you lived 100 years, you would have to spend $27,397 every day of your life to spend it all. One billion dollars is a vast amount of money, but it’s still something that I can wrap my head around.

A trillion dollars is a different matter.  Want to know what a $1 trillion looks like?

According to another website, it would take a jet flying at the speed of sound, reeling out a roll of dollar bills behind it, 14 years before it reeled out a trillion one dollar bills. You can also check out to see other equivalents of $1 trillion.

The entire 2009 GDP of the US was approximately $14.3 trillion. Thus, $1 trillion is like taking 7 cents of every dollar spent in the US.  The federal government spends about $3.6 trillion a year, and $1 trillion equals about 28% of it.  This equates to about $14,000 of spending if you make $50,000.

The illions may sound a lot alike, but there is an exponential difference between a million and a trillion. 

Next time you hear someone talk about $1 billion or $1 trillion, take a step back and think about what they just said and the context.  It they are nonchalantly talking like it is pocket-money, there is a good chance they really don’t grasp the magnitude of what they said.

Keep this in mind when you read the post tomorrow about the size of the current U.S. budget deficit.