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By John Wolf and Tom Cullen CPA
World Health Organization
To prevent infection and to slow transmission of COVID-19, do the following:
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Wash your hands regularly with soap and water, or clean them with an alcohol-based hand rub.
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Maintain at least a 1-meter distance between you and people coughing or sneezing.
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Avoid touching your face.
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Cover your mouth and nose when coughing or sneezing.
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Stay home if you feel unwell.
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Refrain from smoking and other activities that weaken the lungs.
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Practice physical distancing by avoiding unnecessary travel and staying away from large groups of people.
- Coronavirus who
A word on the pandemic years 2020-2021
A new year budgeting always involves some uncertainty. 2021 is a more complex year for budgeting because of the COVID-19 pandemic. It is hard to predict how long we will have lockdowns when people are spending like before. But a budget will have to consider the fixed cost of operation and cut as much as possible any unnecessary spending.
Government assistance is just help for surviving, not a complete replacement of the normal time income. $1,200 to single, $2,400 for couples, and $500 for children is just a small drop of water to the economy, it would not turn the economy back to a normal pace.
The key to having the money you need, whether to pay bills, meet emergencies, or buy the big-ticket items you long for, is a budget that works. Even if your head is well above water, a budget is a useful tool. It helps you capture money that seems to trickle away and redirect it into savings and investments. With a budget, you may find the money you did not know you had.
Merely generating income and sheltering it is not enough. Income must be budgeted into cash. Cash is then used to acquire assets. Budgeting is a necessary activity in our wealth-building program.
A budget is not one thing but two. First, it is a planning system that lets you make decisions based on prudent logic and known facts rather than intuition. Second, it is a control system that lets you contain your expenditures and develop discretionary income.
There are five basic budget rules:
Rule #1: Expenses – 60%
Control your expenses, so they do not exceed 60% of your gross income. This can be difficult. Since your spending habits have evolved over many years, it may take 36 to 60 months to bring your living expenses in line with this percentage. Items vary between families but try to cut back on “toys,” gadgets, eating out, entertainment, travel, and luxuries.
However, you must take action now to control expenditures. Experience shows that individuals and families with financial problems have excessively large and often unspecified living expenses.
Rule #2: Taxes – 20%
Taxes have an inordinate effect on investment decisions in this country. Tax laws define savings accounts, pension plans, investment opportunities, and more. It’s the largest single moving force in the economy, besides greed. While taxes are inevitable, and many taxes seem immutable, the fact is that your tax burden can be reduced through planning.
Effective tax planning must be used to keep income taxes at 20% or less of your gross income. However, most Americans never see the money paid to the government since it’s deducted from their paychecks. If the employer withholds the proper amount, our tax obligation will be covered, and often a refund will be due8. If the employer under withhold, you have a tax bill and probable penalty. Thus, many believe that they have no control over taxes and their withholding. This is not so!
Proper use of Form W-4 is the first step to take to reduce your taxes withheld and thereby free up needed investment cash. The W-4 is a little form with a big impact. The form determines how much the employer will withhold from your paycheck for income tax.
Filling Out the Form W-4
Allowances make all the difference on the W-4 form. The more allowances taken, the less money withheld and paid for federal income taxes. One allowance is permitted for (1) yourself, provided no one else can claim you as a dependent, (2) your spouse, if your spouse doesn’t work, (3) each of your dependents. In addition, the IRS allows an allowance for every $4,000 (the personal exemption amount in 2015) you can claim in itemized deductions or adjustments to income. However, the additional allowances for deductions are only available for deductions exceeding an amount equal to the standard deduction. A careful reading of IRS Publication 919 will guide you in computing estimated taxes to be withheld.
To be continued in our next blog post!
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