Creating a Personal Spending Plan

The definition of insanity may be doing the same things over and over again and expecting different results. I think the key defining element of seeking financial change (and eliminating insane amounts of debt) is doing the right things over and over again and actually getting positive results. Spending with a plan is the right thing to do, and it must be done over and over again.

The creation of a personal spending plan is one of the most important steps of the tax resolution process. A personal spending plan is also the foundation for achieving financial freedom. On the surface a spending plan or budget is extremely basic. Most people do not even have a simple budget much less a spending plan to guide their financial decisions. The purpose of this tax resolution step is to create a personal spending plan that will help you make sure that your money is working for you the best ways possible. Spending plans are also needed to resolve your tax debt and reach your other life planning goals.

A budget is generally defined as:

a) an itemized summary of estimated or intended expenditures for a given period along with proposals for financing them,

b) a systematic plan for the expenditure of a usually fixed resource, such as money or time, during a given period, and

c) the total sum of money allocated for a particular purpose or period of time.

When used as a verb the word budget means to plan in advance the expenditure of something. These definitions each focus on the action of planning. Budgeting is defined as estimated projection of the amount of certain expenses. During the tax resolution process you should use the word budget as a verb and take action. Tell your money where you want it to go rather than trying to figure out where it all went or worse, spending more than you have available and relying on credit cards and debt to get you through the month.

Unfortunately, most people approach the budgeting process the wrong way and do things backwards. They use a legal pad, spreadsheet or budgeting software and track where spending occurred across various categories (food, utilities, credit card bills, etc.). This is a great way to see where your money went during the previous month. But it is a horrible way to plan where your money will go in the future. During the previous step we analyzed where your money has been going in the past. Going forward, you should use the information gathered during the cash flow analysis to create a spending plan or budget.

The budgeting process is often misunderstood because it is typically viewed in a negative manner by the people who need one the most. We have discussed at length how many individuals in debt display problematic financial behaviors. One of the biggest problem behaviors is trying to manage personal finances without a plan. The lack of a personal spending plan or budget is common in the majority of people with tax problems. Many people are resistant to change when it comes to budgeting. Some tax resolution clients view a budget as a form of constraint that inhibits freedom. This is ironic because a personal spending plan will actually lead to financial freedom if used consistently.

Every single household spending plan is unique and each person will be presented with his or own set of challenges. Do not expect your personal spending plan to work perfectly the first time around. It may take a few months to figure this process out. This is normal. Whatever happens on a month to month basis, DO NOT QUIT and NEVER allow frustration to get in your way. Remember that the LifeSpan Process of Tax Resolution and Financial Freedom requires you to take action to replace negative financial behaviors with positive alternatives. The old way of doing things got you into this mess. Replace the old way with a new and improved way of handling your personal finances.

How Does a Personal Spending Plan Work?

A personal spending plan is a written plan to guide your spending habits and provide you with important direction for your money. Operating without a budget or personal spending plan can put you on the fast track to tax problems and debt while giving you a strong sense of feeling completely out of control financially. Following through with the budgeting process and sticking with a personal spending plan will help you assume control of your finances and will empower you to make smart financial decisions.

You cannot eliminate your tax and financial problems without a spending plan. You will not achieve financial freedom with a savings and investment plan. A personal spending plan will help you resolve your tax problems. Subsequently it will allow you to reach financial freedom by maximizing your ability to pay off your tax debt as quickly as possible and then save or invest as much as possible for your life planning goals.

Be prepared for everyone around you to think you are going insane when they see you are implementing a spending plan. Friends and family may act confused or completely freaked out by the fact that you have seen the light and are now operating on a budget. Most people just do not get it. They are probably spending without a clue themselves. That is why most Americans are in debt. It is important to realize this in advance because you should be prepared to explain to your friends and family why you are choosing to manage your money in a more effective manner. There is no need to be embarrassed or ashamed by the fact that you actually have the courage to say enough is enough- I am taking control of my life!

Most budgets fail because they lack purpose. During the tax resolution and financial freedom process your purpose is clear. Eliminate the tax problem, get out of debt, and focus on more important financial and life planning issues. When you create and stick with a personal spending plan never lose sight of the main purpose of following a budget in the first place- tax and financial freedom.

Tax Resolution and Financial Planning

What role does financial planning play during the tax resolution process? Financial planning is about taking control of your finances and is often defined as the process of meeting life goals through the proper management of your money. The planning process helps people make smart decisions about money and prepare for the demands of the future. More importantly, financial planning is about a better now. Some obvious demands are life's major events: getting an education, buying a home, retiring, providing for your children and even their children. Financial planning also concentrates on day to day concerns such as organizing your finances and preparing for the inevitable surprises that occur in life.

So, how does the financial planning process work when a financial crisis related to a tax problem occurs? Tax resolution is a financial planning challenge that is just as much about replacing ineffective financial behavior patterns of financial decision making with more positive ways of managing money and paying taxes as it is getting rid of the tax problem itself. Therefore, tax resolution planning is a natural fit with the financial planning process.

SMART Financial Life Planning Goals and Objectives

Whether you are working with a professional or creating your own financial plan, a comprehensive list of goals and objectives is an important starting point in the establishment of a tax and financial plan. Many people make the mistake of jumping into certain aspects of the financial planning process without a clear sense of direction. Even if you are not working with a planner you should start the planning process with specific goals and objectives.

First, start by making a comprehensive list of the things you would like money to help you accomplish in life. Then rank these goals and objectives from the most important to the least important. Establishing personal goals and objectives is your opportunity to identify what is most important to you. There are no right or wrong answers! This may seem like an easy step. However, this step should not be neglected. Goal setting will help define what you look to accomplish during the financial life planning process.

The following are some of the most common tax and financial planning goals that people generally set. I encourage people to be honest with themselves when ranking goals and objectives. Do not feel constrained by this list by any means. Add your own goals if this list does not include an important area of concern in your life.

Rank from 1 (most important) to 12 (least important).

Level of Importance Tax and/or Financial Planning Goal

______ Complete a planned major purchase (home, rental property, automobile, boat)
______ Increase Net Worth through, savings, investments
______ Establish a debt reduction plan to manage consumer debt
______ Manage income and expenses to maintain good cash flow
______ Minimize current income taxes
______ Ensure a comfortable retirement with income to maintain desired lifestyle
______ Provide education funds for children or grandchildren
______ Maximize the benefits of owning a business, provide for business continuation
______ Provide cash and income for survivors in the event of death
______ Protect assets and income against loss in the event of disability
______ Protect property from loss by natural or legal disaster
______ Pass money and property on to the next generation, minimize potential death taxes
______ Achieve Other Goals (Be Specific). Examples include: change jobs, career change, self-employment, learn a new skill or hobby, lose weight, improve physical fitness.

Life Planning Goals

Next, try to set goals that go beyond the traditional areas of focus listed above. These financial life planning goals should tap into your passions and values. These goals provide deeper meaning and purpose to the entire financial planning process.

Life planning goals generally fall into seven different categories. Take a moment and write down your life goals for each of these areas.

• Family
• Career
• Social
• Physical
• Spiritual
• Financial
• Intellectual


Other goals: ____________________________


After you have ranked your goals and their level of importance take the top three and write them down. Make sure that your goals are SMART and follow the guidelines below.

How SMART are your goals?

S = Specific (Be clear and precise)
M = Measurable (Identify how will you measure progress and success)
A = Attainable (Set goals that you are capable of accomplishing)
R = Realistic (Know your limitations but never underestimate your own abilities)
T = Timely (Set a time frame regarding when you would like to accomplish your goals)

The Three Most Important Goals in My Life

1.

2.

3.

Financial life planning goals focus on the “big picture” and provide a deeper meaning to the tax and financial planning process. Focusing on improving your life as it relates to money is the real challenge that you should be called to achieve. This means finding ways to understand how smart money related decisions will have an impact on your life plan. As this exercise should have demonstrated, smart decisions regarding money matters are guided by the establishment of "SMART" goals.

Financial life planning requires a focus on what matters to you the most in life. It starts the thinking process about what is important to you about money. When establishing tax and financial goals you should consider the role that money plays in your life. That is the "smart" way to approach the financial planning process.

Tax Resolution: Identifying the Need for Change

The tax resolution industry is highly fragmented with the largest tax resolution firm commanding less than 1% of the industry share. Unfortunately, tax resolution firms are unregulated and many of the largest firms do not have stellar track records of service and performance. Recently I surveyed some of the marketing slogans of tax resolution firms advertising on television and the internet. Most of the messages these companies use to reach new clients convey offers of hope and encouragement. However, some companies are marred with extensive customer service complaints and broken promises. Others flat out mislead their clients, misrepresent their services, or market “pennies on the dollar” and “one time only- act now!” settlements. Here are some marketing slogans that I came across recently:

“You could reduce your IRS tax debt to a fraction and be tax debt free”
“Settle for pennies on the dollar- Ex IRS Agents”
“End your IRS Fears”
“Get the IRS off your back”
“Do not be another IRS victim”
“IRS tax problems ruining your life?”

What do all of these statements have in common? They are attempting to reach at the most common emotions shared by a significant number of taxpayers that owe the IRS: FEAR and DESPARATION. The one thing that is missing sometimes is a message that promotes empowerment and accountability while offering the professional expertise that is often needed to help resolve tax problems. It is true that the financial stresses of debt can be overwhelming and debilitating. The IRS and collection agencies can make even the strongest willed person feel powerless and overmatched. Unfortunately, many desperate people make a huge financial mistake when they let fear guide their decision regarding where to seek tax assistance.

Tax representation firms understand the underlying fear and procrastination that is associated with the typical tax resolution client. Emotions and psychological factors play a key role in the tax resolution process. Tax representation firms also understand that some people with tax problems do not usually possess a high degree of financial literacy. That is why the typical American with tax problems is at risk of being taken advantage of when dealing with the IRS.

The following are some of the most common mistakes that people make when seeking to resolve tax problems with a tax resolution or tax representation firm:

* Focusing solely on getting rid of tax debt rather than on changing the underlying financial behaviors that helped create the tax problem.

* Financing the cost of tax representation services only to dig deeper in debt.

* Allowing their fears and doubts to increase the chances they will make an emotional decision with respect to choosing a tax representation firm.

* Failing to realize that an Offer in Compromise (resolving tax debt for less than the amount owed) is not for everyone.

* Falling for the lure of a commissioned sales agent providing empty promises they will qualify for an Offer in Compromise when more realistic alternatives exist.

* Hearing what they want to hear (“you can get out of tax debt”) rather than what they need to hear (“you can take control of your tax and financial situation”).

* Settling for high interest IRS payment plans when other resources are available to pay off the tax debt faster and with lower interest and penalties.

* Getting taken advantage of by not taking the time to do their homework with respect to seeking professional tax resolution guidance.

* Assuming that their tax professional will do all the work and neglecting to send in relevant documents and paperwork needed to proceed with their case.

* Trying to resolve tax problems without a plan.

Rather than simply offering promises of hope and resolution, I prefer to be upfront with my tax resolution clients and let them know that dealing with tax problems is part of a bigger financial process of change. This process may require a great deal of work on their behalf to implement the tax and financial planning recommendations. The end result of the hard work is a genuine sense of financial freedom and is definitely worth the effort. If you or someone you care about has a tax problem, always remember that the ideal solution starts with a personalized tax and financial plan.

Protecting Your Investment Assets From Future Tax Rate Hikes

With the potential for significant tax law changes looming on the horizon strategic planning becomes necessary now more than ever to help preserve and build wealth. From a historical perspective, Americans are currently enjoying favorably low income tax rates. Unfortunately for affluent individuals and families this is soon likely to change. With massive government spending and growing federal deficits it is becoming apparent that changes to the tax code are inevitable and significant tax hikes will likely occur in the not too distant future. So, beyond participating in tax deferred retirement accounts (401k, 403b, IRA, Roth IRA, etc.) what can investors do to protect their current and future assets from these expected tax rate increases?

There are a number of different tax strategies available to consider in advance of these expected tax increases. However, one thing to keep in mind is that tax considerations should never be the sole basis for a planning strategy. Income tax planning is just one part of a comprehensive financial plan. Consider the following strategies as you adapt your financial life plan to the possibility of higher taxes.

Establish a comprehensive plan
The best starting point in preparation of future tax increases is to have a plan in place prior to tax law changes. One of the biggest mistakes that many investors are making today is taking a "wait and see" approach and not being proactive. Comprehensive planning strategies help prepare for life's uncertainties and add meaning and purpose to important decisions related to taxes and other money matters. If you are investing for future life goals and objectives, be sure that you have a written set of guidelines to help you track investment decisions. An investment policy statement should be used to help monitor investments and take into account all potential tax implications.

Shifting income
While there is no guarantee that we will see an increase in tax rates during 2010, it does not hurt to be prepared. In some cases it may make good sense to receive ordinary income in 2009 rather than in 2010 when tax rates may be higher. The highest marginal income tax rate is currently 35%. If you have non-qualified stock options you should consider exercising the options in 2009 if you anticipate moving into a higher tax bracket the following year. Small business owners and investors who have control over when income is received should also consider receiving ordinary income in 2009 rather than in a later year when rates may increase.

Capital gains
If the tax cuts that were initiated during the Bush Administration are allowed to expire, the highest capital gains rate will move from 15% to 20%. If you have investments that have increased in value over the past few years you could consider taking capital gains in 2009 while rates are at their lowest levels. Of course this should only be done if it makes sense from a strategic asset allocation perspective and you were planning on selling within the next 3-5 years anyway.

Tax efficient mutual funds and ETFs
Some mutual funds do a better job than others with tax efficiency. As income tax rates rise, the importance of monitoring the tax efficiency of investments held in taxable accounts becomes essential. As an investor, it is necessary to find money managers who are capable of balancing investment returns with tax considerations. Keep in mind that after-tax investment returns should be taken into account. Do not simply focus on pre-tax investment returns.

Index mutual funds and exchange traded funds (ETFs) are excellent investment vehicles from a tax efficiency standpoint. Traditional index funds and ETFs are, by nature, tax efficient — and cheap. The mutual fund industry also has a wide selection of tax-managed offerings that focus on minimizing taxation. The bottom line is as tax rates go up, the need to focus on tax efficient returns increases for investments held outside tax advantaged accounts such as IRAs or 401ks.

Variable Annuities
Although variable annuities are not my favorite investment vehicles due to cost and other factors, they do have a place in some financial planning situations. Annuities allow investors the opportunity for tax deferred growth and investment gains are not taxed until they are withdrawn. Upon withdrawal variable annuity income is taxed at ordinary rates (penalties may apply to withdrawals prior to age 59 1/2). The tax deferral of annuities becomes more appealing in a rising interest rate environment. If you are considering variable annuities, focus your search on low cost options available through a Fee Only financial planner.

Municipal Bonds
Municipal bonds are another investment vehicle that becomes increasingly appealing for taxable brokerage accounts as tax rates increase. This is due to the increase in the taxable equivalent yield of municipal bonds. Municipal bonds and municipal bond funds provide federally tax-exempt interest. In some cases state and local taxes may also be tax-exempt. If you are reviewing alternatives for the fixed income portion of an asset allocation plan, be sure to consider municipal bonds for your brokerage account.

The taxable equivalent yield calculation is as follows:

Tax-Equivalent Yield = Tax-Free Interest Rate ÷ (1 – tax rate)
So, if the municipal bonds interest rate is 3% and the highest tax rate increases to 40% the tax equivalent yield is 5% (3 divided by .60 equals 5%).

Buy and hold, but do not forget
I have never been a strong advocate of active trading. Active trading adds additional costs and historically underperforms passive investment approaches. The most important determinant of investment performance over time is asset allocation. While investors cannot control the movements of securities markets, they can control costs. As capital gains rates increase, the tax deferral strategies when using a buy and hold approach provide a valuable element of defense. If you have a long-term time horizon for investments, you will likely see a variety of tax law changes during the lifetime of your investment holdings. Buy and hold strategies help defer capital gains taxes until the actual sale.

In summary, aside from Roth IRA's, 401k's, and other tax deferred retirement accounts there are other options investors must be aware of to protect themselves from an increase in tax rates. As the old saying goes, the only constant in life is change. Tax laws in America are about to do just that- change. We don't know exactly when or how much, but tax rate changes are coming. The biggest line of defense is to be proactive and establish a comprehensive financial plan that focuses on investments, taxes, and other aspects of your financial life.

LifeSpan Tax Resolution: Free Book Giveaway

I am pleased to announce that my firm is currently giving away free copies of a book on tax resolution planning. This current promotion is designed to increase the awareness of tax resolution planning. "Tax Resolution and Financial Freedom: Using the Financial Planning Process to Resolve IRS Tax Problems" (ISBN- 9780578014777, $24.95) was released in March 2009. The purpose of "Tax Resolution and Financial Freedom" is to help individuals and small business owners make the smartest decisions possible when trying to deal with IRS tax problems. Free copies of the print version of Tax Resolution and Financial Freedom will be distributed to the first 25 people that sign up for a complimentary Tax Resolution Analysis. A limited number of copies are also available to tax professionals seeking to incorporate basic financial planning techniques with the tax resolution process.

Tax debt problems are a growing concern for millions of Americans. Recently the tax gap in the United States was estimated at $290 billion. The Internal Revenue Service announced in January that they are willing to work with taxpayers experiencing difficulty meeting their tax obligations. However, with the recent levels of government spending and the growing need to close the tax gap IRS collection efforts are likely to increase for taxpayers that ignore previous collection efforts. Many different solutions exist for taxpayers having difficulty resolving their tax problems. The LifeSpan Process of Tax Resolution and Financial Freedom was designed to help people choose the most cost effective solution to their problems related to money and taxes. Most importantly, a tax resolution plan follows basic principles of the financial planning process. Many tax resolution efforts fail over the long haul because they only treat the symptoms of tax debt rather than the underlying problem- lack of a genuine tax and financial plan.

LifeSpan Financial Planning, LLC currently provides a free Tax Resolution Analysis for our prospective clients. The confidential analysis generally lasts 30-45 minutes and is completed by phone, in-person meetings, or via secure video conferencing. This brief analysis is designed to provide a basic action plan to help people take the steps necessary to resolve tax debt problems using a tax resolution plan. LifeSpan encourages people with tax problems to look at all of their options and always do their research when choosing whether or not tax representation is necessary.

The Tax Resolution Analysis is a no-blame, no shame, no obligation opportunity to take the first steps toward financial freedom. Relatively few financial planners specialize in tax resolution planning. I think it is essential for people with tax debt to receive objective, unbiased guidance as they try to get their financial lives back on track. As a Fee Only financial planner, my firm is obligated to uphold the fiduciary responsibility to our clients. In general, this means that we will always act in the best interests of the client as they work to resolve tax debt related issues.

To reserve a free copy of Tax Resolution and Financial Freedom contact me toll-free at 877-TAX-9110 or send an email to scott@lifespanplanning.com with the subject line BOOK OFFER.