Author: roger-varner

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How Much Debt Can You Handle?

In life there are times when the need arises to make a purchase even though the funds are not available. This results in the need to borrow from someone who has excess money and willing to lend it with the stipulation of interest due. According to lowell financial ltd, the concept of debt has been documented going back four thousand years to Babylon when loans were being made between temples and merchants. The ability to handle debt was as necessary in early history as it is now—maybe even more so.  In ancient Greece, for instance, if a man could not pay his debts, he, his wife and children would be forced into servitude until their labor paid off the loan. With interest constantly accruing, one loan default could result in many generations being enslaved. Today laws protect borrowers from such harsh consequences, but if debt is not handled correctly, debtors may feel they are just one step from that same sentence of servitude.

The amount of debt one can handle is dependent on individual situations but there are some well-respected guidelines that can be used to gauge where one stands where debt accumulation is concerned. For most of us, debt always will be part of our lives but with proper management it can be controlled.
The first step is to sit down with a piece of paper and write down the debts you pay down on a monthly basis, i.e. the mortgage, car loan, student loan or credit cards. Add these payments to determine the amount of money going towards your monthly debt repayment. Now determine your monthly income on a pretax basis by taking your annual salary and dividing it by twelve. With your monthly income and monthly debt amount in front of you, calculate the ratio of debt to income by dividing the monthly debt amount by the monthly income amount. This will yield a ratio of how much of your income is being allocated towards your debt. In a “good” financial situation, this ratio should be below 30 percent; up to 36 percent in an “okay” situation, but if it is above 36 percent, your credit score will be negatively affected. When it approaches 40 percent, it is beginning to take a turn for the worst. At 50 percent there has to be drastic change or certain financial ruin is in the near future. You should be aiming for a debt to income ratio of below 30 percent, so think twice about purchases if it will take the ratio to or above 36 percent.
One type of debt-to-income ratio does not necessarily determine how much debt you can handle. Finances are never that simple and different situations should be looked at differently. For instance, one person may have the luxury of living rent/mortgage free while another person may have multiple dependents and a mortgage affecting their tax rate. The debt-to-discretionary income ratio takes these factors into account. This ratio is calculated by determining what monthly expenses are necessary versus which are discretionary. Things such as rent/mortgage, food, utilities or transportation are necessary for living. Take this monthly expense and subtract it from your after tax income or the amount of monthly pay that you’re able to deposit in your bank account. This figure is your discretionary income, as it is not necessary to spend but could be spent by the individual to live a certain lifestyle.
The minimum monthly amount due on revolving debt such as credit cards can be divided by discretionary income to arrive at the new ratio. This number would ideally be below 20 percent, but up to 25 percent is still okay. When this ratio crosses 33 percent the warning bells should begin to sound that the debt is beginning to be too much. At 40 percent a serious analysis of spending and prioritizing should take place. Approaching 50 and 60 percent signals that lifestyle changes need to be made or those changes will be made for you in the form of cash flow problems.
Knowing how much debt you can handle requires an understanding of how much money is coming in and how it is going out. While some may feel the pressure of debt pushing down on them, sitting back and not taking action is setting up failure. Ignoring a debt problem will not make it go away, but taking proactive steps in monitoring one’s debt level will help to determine if there is a problem or when one might be approaching.
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The Pros and Cons of Internet Banking

In the 90s during the Internet boom, it seemed like the whole world was on track to go digital and online. Americans were beginning to see the usefulness of the Internet and began to send mail, shop, and receive news and other types of media all digitally. The Internet was changing our way of life in a way not seen since the Industrial Revolution. But as exciting as these changes may be, is there a limit to what the Internet can do, especially in the banking industry?  

The Automatic Teller Machines (ATMs) changed the banking system by computerizing some basic transactions. Then Internet banks offered the option of computerizing ALL of the transactions that a bank customer could make and thus do away with the need for a physical structure we know as a bank branch. Just as ATMs allowed banks to reduce their operating costs, Internet banks further reduced operating costs by not having to pay rent, maintenance or insurance on bank branches. The Internet banks’ ability to operate at a higher efficiency has allowed them to work under a different business model than the traditional bank.
 
With their reduced operating expenses, Internet banks offer better interest rates and charge lower fees than brick and mortar traditional banks. Because everything is done online, there is no need to change banks if you relocate, which may have to be done with traditional banks. However, while these pros allow customers to both save and earn more money at the same time, some people suspect that Internet banking is too good to be true. As a result, many people are not comfortable with trusting their finances to an all-digital business.
 
To help alleviate those fears, a majority of Internet banks participate in the FDIC program. This fact instills confidence in their customers that they are indeed a legitimate bank and reassures them that their money will be just as safe in a digital account as it would be in a traditional bank. The FDIC website has a Bank Find tool that allows users to check the status of any bank to see if they are truly insured by the FDIC.
 
While Internet banks seem to be the next step in the banking evolution, they, too, have shortfalls that they haven’t yet been able to overcome. Personal finances are a very important, confidential part of everyone’s lives, but they also can be confusing. Customers want confidence and a level of trust in the institution that is holding their assets. That is why with physical banks, the ability to see the banker face to face and shake their hand creates a comfort that Internet banks only dream of. While online banking is becoming more and more common, traditional banks have made great strides at closing the gap, offering the same online tools as their Internet peers such as online bill pay or smart phone applications. But they also have services, such as safety deposit boxes, that Internet banks cannot offer. 
 
Internet banks have been able to compete with traditional banks based on their lower operating costs, but because they have only an online presence, there are some services they cannot offer. On the other hand, due to recent law changes and the recovery from the credit crisis, banks are altering their business models, resulting in changes in their services and fee structure. For customers, this can cloud the decision of which bank to choose. It’s important that customers weigh all of these options carefully before choosing their bank. 
 
As for myself, I keep an account with both an Internet bank and a traditional bank in an attempt to enjoy both of their benefits while minimizing their shortfalls.
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When are Home Office Deductions Allowed?

 There are many Americans who work from home and the tax code allows for the deductions of some of the home office expenses.  The IRS has guidelines to determine what qualifies as a home office and the type and extent of expenses that can be deducted.  The IRS has recognized that many tax filers are generous with claiming home office deductions and as a result, these deductions draw an above average amount of scrutiny.  Those wishing to claim home office deductions should be confident that their deductions meet the IRS’s criteria and be able to prove it.

The IRS wants you to know six things to test possible home expenses to see if they meet the threshold.  The test to determine what constitutes a home office is multifold and varies depending on the type of business.  
 
To claim a home office, it must be a section exclusively used for business regularly as the principle place of the business or as a place to meet or deal with customers.  The tough part here is the word “exclusively.” That means the area cannot be used for any personal use such as paying bills, surfing the Internet or working on any non-business related activity.  The office does not need to be a whole room or have its own entrance from the outside, but it must be a defined space that doesn’t co-mingle with personal space.  The use for business regularly does not mean that 9-5 hours must be kept, as even part time use of the home office will qualify.
 
There are certain uses which do not need to meet the “exclusively used for business” criteria and these include certain storage use, rental use, or daycare-facility use.  A daycare-facility, for example, is rarely limited to a section of a room or to a single room as it would be routine to use many sections of the home.  Storing inventory in one’s basement does not mean that personal items now must be stored in the attic.
 
Now, claiming one’s entire home mortgage interest payment will surely grab the IRS’s attention.  This is because the IRS only allows for a percentage of the home expenses to be deducted based on the percentage area that the business occupies of the home.  For example, if a home office is 100 square feet in a 2,000 square feet home, only five percent of the electric bill or heating bill can be deducted as a qualifying deduction.
 
If the home office expenses are larger than the business income, there are some restrictions on certain deductions.  This prevents the home business from carrying over large business losses from year to year as a result of home office deductions.
 
The IRS also has special rules for persons storing business inventory and for qualified daycare providers.  If these deductions are of interest to you, be sure to investigate the special rules the IRS has for them.
 
Self-employed individuals should report these home office deductions on the Form 8829, Expenses for Business Use of Your Home.  The summation should then be carried over to line 30 of Form 1040 Schedule C, Profit or Loss From Business.
 
Other rules apply to those who are not self-employed but who are allowed to work at home.  The home office must be for the convenience of the employer. While it is convenient for the employee to walk from their bedroom and down the hall into their office, the IRS wants to know that the reason for the home office is for the employer’s benefit.  The IRS will also want proof of this usually in the form of a letter from the employer that reads to the effect, “No home office, no job,” thus showing that employment is dependent on the ability to work from home.  
 
This article is not to be considered tax advice and those wishing to claim home office deductions should consult the IRS Publication 587 and their tax advisor.  The tax code is difficult to grasp with its vast amount of code in addition to its ever changing behavior, but knowing the basics should help to pinpoint the questions a person working from home should ask when considering home office tax deductions.