I’m not much of a re-reader of books, but one book I’ve read several times over the years is Thinking in Systems: A Primer by Donella Meadows.
The idea behind the book is a simple one. It proposes that there is value in looking at the problems of the world, from the scale of our own lives to global challenges, in terms of systems rather than separate facts. A system is simply a collection of things that produce a pattern of behavior over time, usually achieving something.
It can be really useful to look at personal finance through that lens, so let’s get started.
Start with the basics.
In our lives, we have certain “pools” of money from which money flows in and money flows out at different rates. We have pocket money, checking accounts, savings accounts and investment accounts — we’ll stick with mostly those three kinds of accounts.
Money flows into those accounts from a variety of places, too. For many of us, the main flow of money coming in is from our jobs, which puts money in our checking account. If we save for the future, money probably flows from our checking account to our savings account. If we’re investing for retirement or for other purposes, money flows from our checking account to our investing account, or perhaps even from our job directly to our investing account (in the case of a 401(k), for example).
I often like to draw things out when I’m visualizing things in this way, so the way I’ll usually do that is to draw a big box to represent a pool, an arrow to represent the flow of something into or out of a pool, and a cloud to represent something outside the scope of what I’m drawing, and I label each of those things as I go.
So, I might draw a cloud and write “MY JOB” inside of it, then draw a box over to the right that says “CHECKING ACCOUNT” inside of it, then draw an arrow from “MY JOB” to “CHECKING ACCOUNT” and write “PAYCHECK” above that arrow. Make sense? It’s a way to visualize this.
You can keep adding details to that picture. You might add another box that says “SAVINGS ACCOUNT” and have an arrow from checking to savings that says “EMERGENCY FUND SAVINGS.” You might have a box that says “RETIREMENT INVESTMENTS” with an arrow from your job to that retirement box that says “401(k) CONTRIBUTIONS” and an arrow from your checking account that says “ROTH IRA CONTRIBUTIONS.” You might even have an arrow from “RETIREMENT INVESTMENTS” looping back to itself that says “DIVIDENDS REINVESTED,” because dividends earned by your retirement account usually just fold back on themselves.
Of course, there’s a lot of money flowing out of the system as well, mostly out of the checking account. These could be represented by arrows going away from the “CHECKING ACCOUNT” box and into various clouds labeled with things like “BILLS” and “GROCERIES” — all of the things you spend money on, split up in ways that make sense to you.
Here’s a simple example of what I’m talking about that I sketched out quickly on a sheet of scratch paper. It shows money coming in, money going out to various places, and a few pools of money that I have.
I strongly encourage you to make a sketch like this for our own finances, adding details as they make sense to you. It can be as detailed as you’d like — in fact, it can be very useful to simply add every element of your financial picture that concerns you and think about how they connect to other things.
Money flows through the system.
The thing you’ll notice about such a diagram is that the arrows represent the flow of money through your life.
It comes in from sources external to your life — your workplace, the Social Security Administration, the Treasury Department, the companies that issue dividends, perhaps a business you partially own.
It moves to pools within your life that you own — your checking account, usually. Sometimes, it will move around among multiple pools in your life – money might go from checking to retirement, for example.
Then, a lot of it flows out of your life, going to all of the different businesses and organizations that you pay for services. A little goes to the energy company. A little goes to the grocery store. A little goes to your favorite restaurant. A little goes to a charity.
You might recognize that some arrows are bigger than others. If you want, you can represent that in the drawing by making a particular arrow nice and thick, or even drawing it with a large-tipped marker. That way, specific arrows that suck a lot of money out of your accounts show up more clearly.
Do your pools fill up?
Something you’ll quickly notice is that, if the money flowing in is greater than the money flowing out for a period of time, money will start to collect in the pools in your life.
If you make more money than you’re spending or transferring to other accounts, your checking account will gradually accumulate money. If you put money into retirement without withdrawing for many years, your retirement account will gradually accumulate money.
I really like to use a water analogy here. If you spend money as fast as it comes in, your financial life is much like a river. It flows in, it flows out. You never accumulate much.
On the other hand, if you slow down the rate at which money flows out of your life, it’s like building a dam in the river. The water will start to build up above that dam, much like how money will start to collect in your accounts.
What if you figure out how to increase the rate at which money flows into your life? That scenario looks more like a flood, and depending on how you respond to that flood, it either might start pooling up (meaning you start saving or investing that money) or it might simply widen the river and keep flowing out of your life (meaning you start spending more on non-essentials).
My number one rule of personal finance is to “spend less than you earn.” It’s actually several pieces of advice wrapped into one phrase, because not only does it give you the secret to accumulating money, it points to two ways to accumulate money faster than you are right now – spend less or earn more. Spending less means that you’re trimming down the arrows leading out of your pools, while earning more means you’re widening or increasing the number of arrows leading into your pools.
If you want your pools to fill up — in other words, have more money in the bank and achieve financial success, you either need to widen the arrows coming in (or increase their number) or narrow the arrows going out (or decrease their number).
Why are you doing this?
This is a great point to step back and ask ourselves about the purpose of the system. What is the purpose of this system that you’re looking at?
Obviously, a big part of the purpose is to sustain your ordinary life activities. You have a handful of bills you need to pay, things to ensure that you have food on the table, a roof over your head, clothes on your back and more. Those are arrows going out. You need enough arrows going in to make sure that those arrows going out are covered.
The question is what else do you want to do?
If you want to live a more materially luxurious life right away, you’re going to add arrows going out of the system until it matches or even exceeds the arrows coming in. Beyond that, you probably want to add more arrows coming in or widen your arrows coming in — meaning promotions at work, a new career initiative or starting your own business — so that you can add more arrows going out for luxury goods and experiences.
If you want a simple, stable life with less stress, you’ll want to decrease the size and number of arrows going out, replacing them with arrows between your various pools. You decrease the number of arrows going out by canceling services and paying off debts. You reduce the size of arrows going out by cutting back on various types of luxury spending. The arrows between pools mean that you’re moving money from checking to investments.
If you’re saving for a goal, you’re likely following a mix of these plans. You want to reduce the size and number of arrows going out, increase the size and number of arrows coming in, and then add some arrows (or increase the size of them) between the various pools in your life.
Again, I find it really useful to sketch what I want the system to ideally look like when I’ve achieved what I want to be doing. I just draw a picture of what my financial system looks like when I’ve achieved my goal (or am getting very close to it).
For example, my goal is to retire as early as possible. In that situation, my financial system looks something like this:
What’s changed here?
First, there is no arrow coming in from a cloud called “JOB.” That’s because I’m no longer working for a wage.
Instead, now there are arrows coming into my checking account from my retirement accounts, labeled “DISTRIBUTIONS.” That’s the money I’m withdrawing from my retirement accounts when I retire.
There’s also a reduction in outward arrows. In my first picture, I had a cloud representing “DEBTS.” In my ideal situation (and, luckily, my current situation), I don’t have any debts, so there’s no arrow going out to that cloud.
Here’s the reason for doing this: when you draw a picture of the system you have now and then the system you ideally want that represents your goal, the differences between the two are a checklist of the things you need to do to get there.
So, for me to get to where I want to go, I need to have my retirement account pools big enough so that the arrows that would come in from them would cover all of the arrows going out, ideally forever. That way, I can get rid of the arrow coming in from “JOB,” which is really the big goal here.
Basically, a systems-based view of your finances gives you a nice visual way to look at your financial situation right now and compare it to where you want it to be. That comparison tells you what needs to change.
Often, those changes boil down to changing the arrows around. How do you eliminate some arrows? How do you add others? How do you change the “size” of them?
Here’s how to reduce the number of arrows going out of your pools.
This approach aims to increase the amount of money staying in your pools by simply eliminating bills entirely. That money that stays with you can then be used for other purposes.
Pay off your debts. This is an obvious way to eliminate a bill. Once you’ve paid off a debt in full, that arrow going out of your system goes away.
Eliminate an expense permanently. You can do this by canceling a gym membership or a subscription service. Again, that particular arrow going out of your system goes away once you cancel that service.
Consolidate some bills. In general, consolidating your bills reduces the amount of money you’re paying in total for those services. You replace a few arrows going out with one bigger arrow, but that bigger arrow is smaller than the combined smaller ones. You might look into packaging together various insurance plans you have under one insurer, for example. This will eliminate some insurance bill arrows and replace them with one bigger insurance arrow. You might do the same with debts if you can find a more friendly interest rate.
Here’s how to make arrows going out smaller.
Another effective way to keep more money in your pools is to simply make arrows smaller. In other words, you find ways to reduce particular expenses in your life.
This is where frugality is useful. Frugality is all about the art of making arrows smaller in a way that balances the good you get out of those expenses with what you’re spending. Your aim is to reduce the size of those arrows without significantly reducing the benefit you get from those arrows.
Here are some of my favorite ways of doing this.
Buy store brand food staples and household items. Buying store brand garbage bags and toilet paper and flour is less expensive than the name brand versions of those items and almost always do the job just as well. You get virtually all of the value from those expenses while spending much less. The arrow just gets a little thinner.
Make your home more energy-efficient. This is all about thinning the arrow that goes out to your energy company without changing the way you live. You can do this by replacing light bulbs with more energy-efficient ones, buying EnergyStar appliances when replacing them, using fans more efficiently instead of using air conditioning or furnaces, and so on.
Do more things for yourself. Instead of getting take out, make something at home. Instead of making convenience food, make something from scratch. Instead of paying for an oil change, do it yourself. Instead of calling a plumber, try fixing your own toilet issue first.
Here’s how to make the arrows coming in bigger.
This usually involves improving your current career path or small business trajectory. The catch with this approach is that when you make that arrow coming in bigger, it usually comes with non-financial costs — more stress, more time working, and so on. Often, that stress happens before the arrow gets bigger.
Get a raise or a promotion. This usually involves convincing your supervisor or other decision-makers within your current business that you’re doing a good enough job to warrant more pay (to keep you as an asset and/or to keep you away from competitors). If you’re promoted, this often involves more responsibility, too. Much of the work needed to earn a raise or promotion happens before you actually get those things, so it’s effort put in for the long term benefit.
Switch jobs within your career path. You may also simply switch to another job within the same career path, one that pays more for the same work or offers some advancement for you. Again, you probably need a solid resume or connections to make this work, which are things you build up before you make this kind of move.
Start a new career. This might involve a lot of night classes or other efforts in your free time, meaning you’re probably just treading water in your current career for a while, or it might mean walking away from your current career entirely to get a fresh education.
Double down on building your business for the long term. If you’re an entrepreneur, look for ways to increase your business income for the long term by investing in things that will produce long term results. This varies widely from business type to business type, but you’ll want to aim for things that will make your arrow thicker for the long term, not just a short term boost. Of course, these types of investments usually don’t produce additional income in the short term.
Here’s how to increase the number of arrows coming in.
Another approach is to add more incoming arrows to your system. There are a few ways of doing this.
Get another job. This is the easiest way to do it, particularly when you’re wanting immediate results. Getting another job means sacrificing a chunk of your free time to get a paycheck in pretty quick order.
Create something that will produce a long tail of income. You might create a website with ads, make a high-quality YouTube tutorial video, write a book or an ebook, or create something else that people will either buy (or enjoy for free with ads) with little additional effort from you. Those things will produce revenue for you for a long time without a lot of additional work, but you’ll invest a lot of work upfront for minimal return.
Invest. Many types of investments become their own arrow producing money for your system. Money in a savings account becomes a small interest arrow. Stocks produce dividends. Investment properties produce rent.
Changing the arrows around to achieve your goals is the real puzzle of personal finance.
A systems-based approach to personal finance makes it easy to visualize your financial system as it is now and where you want it to be. The challenge, then, becomes figuring out what needs to be done to make that change happen.
Do you add more arrows? Do you remove arrows? Do you make some outgoing arrows smaller? Do you try to make some incoming arrows thicker?
Those questions aren’t purely financial questions. To really answer them effectively, you need to examine other areas of concern in your life. What things do you most enjoy? What things do you most value? What things do you spend money on that you don’t really get much value out of? What things do you spend time and energy on that you don’t get much value out of?
As you start to answer those questions and apply them to your life, you’ll find that they change the picture of your financial system. Your pools grow. Arrows change and disappear and appear.
Gradually, your picture starts to look less and less like what you started with and more and more like the goal you have for yourself.
For some, this type of visual approach to personal finance makes something that feels like boring numbers on a spreadsheet come to life in terms of something meaningful. Consider this type of systems-based approach to be another tool in your financial toolbox, particularly if you think visually rather than numerically.
The post Try This Systems-Based Approach to Personal Finance appeared first on The Simple Dollar.
How to Change/Update Name in Aadhaar Card after Marriage
Aadhaar card is one of the most important proofs of identity and address these days. It can easily be downloaded, carried in the digital form and shared instantly for authentication/verification. Aadhaar card contains both biometric as well as the demographic details of the user making it better than any other identity proof. It contains demographic details such as name, date of birth, gender, address, etc. One can get these details updated as and when wanted. In case of women, they can get their name changed in Aadhaar card after marriage quite easily.
How can women change name in Aadhaar card after marriage?
A woman generally adds her husband’s title to her name after marriage. Even though it is not mandatory, but the addition of title to the name is quite prevalent. However, if you want to add the title to the name legally, you will have to get it updated in your document proofs as well.
Updating your name in the Aadhaar card is not a tough task. You can follow the steps mentioned below to update your name in Aadhaar card after marriage:
- Visit a nearby Aadhaar Enrolment Centre (Click here to locate one)
- Provide your Aadhaar number to the executive
- Fill the Aadhaar Enrolment Form and submit it with the required document proof to the executive
- The executive takes your biometric data for authentication and feeds the details
- The document proof is scanned and the original document is returned back
- Once the application process is complete, the executive gives an acknowledgement slip that contains the acknowledgement number
- This acknowledgement number can be used to track the status of Aadhaar update
- Finally, make the payment of a fee of Rs. 50 (including taxes)
What are the documents required for updating the name in Aadhaar card?
A woman who wants to get her name changed in Aadhaar card after marriage has to provide certain documents at the time of updating details at the Aadhaar Enrolment Centre. The applicant has to submit the Marriage Certificate containing address issued by the Government.
It is worth mentioning that the applicant has to take the original Marriage Certificate with her. The executive scans the copy and returns the original certificate. In case the applicant provides a photocopy of the original, the application may be rejected at the time of approval.
Alternatively, the applicant can furnish any of the following documents to get the name changed in Aadhaar after marriage:
- A document containing a proof of the marriage of the applicant issued originally by the Marriage Registrar
- Legally approved name change certificate
- Identity Certificate containing the photo of the applicant on a proper letterhead issued by either a Gazetted Officer or a Tehsildar
What is the fee charged for updating name in Aadhaar card after marriage?
An applicant has to pay a fee of Rs. 50 (inclusive of all taxes) to the executive once the update request is submitted and he gets the acknowledgement slip. The executive cannot ask for a fee more than the prescribed limit by the UIDAI. In case an executive does so, you can file a complaint online through the Grievance Redressal Mechanism.
In how many days will the name in Aadhaar card get updated?
It may take up to 90 days for updates to reflect in the Aadhaar card. However, you can check the details in your Aadhaar online and if updated, it will reflect in your Aadhaar card. The acknowledgement slip contains the URN (Update Request Number) which can be used to check the status of the Aadhaar card.
Will UIDAI send me the updated Aadhaar card? If not, what should I do?
UIDAI send an updated Aadhaar card to the address mentioned in the Aadhaar card through India Post. In case you do not receive the updated Aadhaar card, you can also order Reprint of Aadhaar online. A fee of Rs. 50 (taxes included) has to be paid online and the Aadhaar copy is sent to the cardholder’s address.
Can my application for name change in Aadhaar after marriage be rejected?
Yes, the application for updating the name in Aadhaar card can be rejected on grounds of incorrect or unverifiable document proof attached at the time of application. It is thus recommended that you carry the original marriage certificate at the time of updating your name in Aadhaar.
Can The PPP Loan Affect Your Credit Score?
(The following is a transcription from a video my real estate agent, Jake Blount, and I recorded. Please excuse any typos or errors.)
Can the Paycheck Protection Program (PPP) Loan negatively affect your credit score?
And, can it prevent you from getting approved for a mortgage?
It seems the answer is yes.
I wanted to understand this better. So, I sat down with my real estate agent, Jake Blount, to discuss how to work through this if you got the PPP loan and are trying to get a mortgage (or other loan).
We will be providing some information that just may help you avoid your credit score being affected negatively by the PPP loan, and help you get that loan approved.
We welcome you to view our discussion with our SeedTime community, here:
Below is a the transcript from our conversation:
The PPP Loan
Bob Lotich: I have my friend and real estate and Jake here and we were chatting the other day and I got the PPP loan and he said, “Hey, fun fact about the PPP loan, it can prevent you from getting a mortgage.” And so I want to hear all about this. I want to hear what this situation is because I don’t think anybody knows about this. I haven’t heard about this at all. Tell me what the deal is like, what happened? What was the story here? Where are we?
It Can Prevent You From Getting A Mortgage
Jake Blount: Basically it wasn’t a client, it was actually myself. That makes it closer to home, more personal. Basically we had been planning on buying a new house for a while and renting out our current house to try to build up some rental income and kind of rental properties. And house had on the market on our street for a while and we finally were like, okay, I think this is the time it’s been on for a while. And so we were going to start to kind of go down that path. And so we’re like, great, we got our taxes done. Little bit of a rough start from the beginning of coronavirus, but we were able to get the PPP, which brings us to why we’re kind of talking about this now in the first place. Get the PPP in May, May 5th. It was the first round of getting it. Great. We got it in my bank account. I had lost a couple deals.
Bob Lotich: Got some money. Yay!
Jake Blount: Yeah, got some money. Cha-ching. Had a couple of deals fall through, so it was perfect. It got me right through the time to when some of those deals started coming back again. I had a couple of deals that were ready to close. I’m feeling good. It’s time to move forward with this purchase. And so we got our taxes done. Now it’s time to talk to the lender. Let’s get the mortgage. Verbally I talked on the phone what our income was, where we’re at, what we’re planning on doing. He’s like, “Great. “You will qualify for this no problem. Great.” All right, pumped. He was like, “All right, well, we’re going to do this thing. Let me look at your credit report.” Pull his credit report. He’s like, okay, this is fine. You know, a little $35 a month credit card, no big deal. And then he’s like, “What is this $750 a month loan?” And I was like, “Wait, what?” He’s like, “What is this maxed out $750 a month loan?” I was like, “Ah, I don’t have a maxed out 700. What are you talking about?” My first thought is somebody has frauded us.
Is Fraud The Issue?
Bob Lotich: Stolen my identity or something.
Jake Blount: Yeah, so that’s the first thing I say is, “I think someone has stolen my identity.” And he was like, “It’s happened before. We got to figure this out.” And I was like, “Where’s it at?” He’s like, “It’s at Pinnacle Bank.” And I’m like, “Pinnacle Financial Partners, that’s who I bank with.” And I was like, “Wait, I bank there.” I’m like, “Somebody stole my identity and had the audacity to pull a huge loan in my name.”
Bob Lotich: At your bank.
Jake Blount: At my bank. And so I’m totally following this whole thing of fraud or whatever, thinking that that was what’s happening. Because I’m all in thinking, I’m not thinking about the Paycheck Protection Program, which is it ended up being was the Paycheck Protection Loan was that loan because it was at the time a two year payback period. If you’re talking about a $15,000 loan with a two year payback period, so it was this massive debt on my account and totally.
Bob Lotich: Unexpected. You didn’t know it was there.
Jake Blount: Unexpected.
Is The PPP Loan Actually A Loan?
Bob Lotich: Well, and everybody gets a PPP loan because you don’t really view it as a loan because it’s forgivable and everybody I assume is going through it thinking, I’m going to get the forgiveness and it doesn’t exist as a loan.
Jake Blount: Or it did. Yeah. And so I called my banker and that was the first thing I asked him. I’m like, “Hey, what is this deal? What is going on?” And he starts laughing. I’m like, “Why are you laughing at me? I’m going through a bad time here. And you’re going to laugh at me.” And he said, he was like, “I’ve had this phone call five times this week already.” I’m like, “Really?” I was like, “What’s going on?” He’s like, well, as you’ve kind of explained some of the previous videos, the Paycheck Protection Program it changes every couple weeks they have a new thing because I’m guessing that businesses are coming back and saying, “Hey, this isn’t working for us.” And they want it to be helpful because that’s the purpose of the loan. That’s when I went on a research binger and I think this is where Bob and I, we share a common brotherhood, research.
Bob Lotich: Research. Yeah, yeah, for sure.
Jake Blount: I started reading about it and basically that’s when I kind of started finding out that it was supposedly, most small business association loans are not personal or they’re not personally guaranteed, but they are reported to the credit bureaus.
Bob Lotich: Credit bureaus.
Jake Blount: Yeah. Yeah. And this one was supposedly not going to be that way because it was this forgivable loan. It had a weird kind of payback period. That was the original intent of the loan. But then they were actually not even supposed to report it at all, but now they’re reporting it to personal credit and loan.
Bob Lotich: Wow.
Jake Blount: And that’s what affected my mortgage because they were looking at it as this is a personal guaranteed loan.
Resolving The Issue
Bob Lotich: Where did it go from there? I’m assuming you got those resolved in your case.
Jake Blount: Almost.
Bob Lotich: Almost.
Jake Blount: Yeah. I have the good news.
Bob Lotich: All right, let’s talk about the good news.
Jake Blount: Immediately I’m asking the banker, “What can we do about this?” Because we know the intention is everybody in America, everybody knows what that means and how it works. And we kind of made some suggestions about him writing a letter to the mortgage lender and saying, “This is the purpose of the loan. And so therefore we can’t consider this or we shouldn’t consider this on your personal thing. Plus it’s going to be forgiven because it was used in the right purposes.” And the lender was still, “We have rules, because of 2008 and the crashes where they used to just if you had 20% down, they’d give you any size loan. You had 20% down.” All that’s changed.
And so the good news is if your lender they’re starting to work this out because we’re kind of the first round of people who are finally starting to get back on their feet, moving forward. And they’re like, now I’m going to start looking at that house that I was going to buy in March. I’m going to start trying to look into that now in June, July, August. And so now that’s when lenders are starting to figure it out. My lender personally, at Movement Mortgage, he said that they actually are at the very top writing a letter that kind of states what this is to send to the underwriters. And supposedly the underwriters are going to accept it. I don’t know because my banker also said he’s had a couple people not able to get the loan because of it.
Bob Lotich: That is crazy. It’s just amazing how quickly this whole thing rolled out and all of the kind of dominoes that are falling and the negative effects of this and the fact that some people are not able to get a mortgage because of this, unknowingly. They had no idea.
Jake Blount: The banker told me that it was, they didn’t know because it wasn’t supposed to happen this way. The intention of the loan was to never be on your personal credit report.
Bob Lotich: Okay. If somebody is watching this and they’re in this situation, what do you have any suggestions?
What You Should Do
Jake Blount: Yeah. The first thing is, there’s a differentiation of when you got the loan, this may be getting too much info.
Bob Lotich: You can never have too much.
Jake Blount: But if you’re before June 5th, it was defaulted to a two year payback period. If you’re after June 5th, it’s defaulted to a five year payback period.
Bob Lotich: Okay. That’ll change things considerably.
Jake Blount: That will change things considerably because that’s a very big difference in your payment scheduling. Also, you can talk to your bank if you had it pre June 5th, which and there you can renegotiate it.
Bob Lotich: To turn into a five year or something?
Jake Blount: To five year.
Bob Lotich: That reduces your monthly payment. And that would just look better.
Jake Blount: Oh, way better need that day to come.
Bob Lotich: For the mortgage company. Okay.
Jake Blount: It looks way better.
Bob Lotich: That’s one way. And then you said, who was it? Your banker is writing a letter to the mortgage company?
Jake Blount: He said he could write a letter basically stating, this is the literal law that the banker can send to the lender to say, “Hey, this is forgivable. This is now five years. At worst case scenario, if it’s not forgivable, it’s a five year loan so it looks a lot better.” And then the third thing would be if your mortgage lenders could already be taking right steps to get this sort of situated anyways. Also, the first round of forgiveness applications, I think starting July 6th. That’s another way to get it forgiven, wiped away so that you can move forward.
Bob Lotich: Yeah, that’s great. I think the moral of the story here is that the thing is just a mess, but bottom line is some people are already in this situation and you gave us three different things we can do to kind of move forward in that. And that’s making the best of the situation we’re in.
Jake Blount: Exactly, yeah. Because this is probably going to be your window unless you’re crushing the rest of 2020, let’s hope we do. It might be a dip on your income so 2021, you might have to wait till next tax season 2022.
Bob Lotich: Yeah. All right. Well, if you’re in Nashville, you need a great real estate agent, Jake is my guy and I recommend him highly. But other than that, that’s all we have for you today. Be blessed, be blessing. See you soon.
SeedTime Money Mastery Quiz
Hey, thanks so much for watching the video. If you haven’t yet taken our Money Mastery quiz, be sure to do that.
Linda Lotich: Yeah, It’s just a super quick two minute quiz and it’s going to help you understand how good you are with your money.
Bob Lotich: Yeah, and it’s going to provide a custom report giving you specific suggestions of how you can reach your financial goals up to 10 times faster. Head over to: seedtime.com/quiz to get started now.
What is Adjusted Gross Income (AGI)?
If you’ve read a bit about personal finance, chances are that you’ve heard the term Adjusted Gross Income (AGI). A fair bit of tax considerations are based on AGI, so it’s well worth familiarizing yourself with the term. Here’s a quick introduction to AGI and when you might need to consider yours.
Calculating Adjusted Gross Income
The IRS defines AGI as “gross income minus adjustments to income.” That’s not exactly a helpful definition. It doesn’t tell you what gross income is or what adjustments must be subtracted.
Your gross income is simply the total amount you receive in a given year. It is not limited to wages or salary. It includes wages, salary, bonuses, dividends, royalties, interest, business income, pensions and annuities, capital gains, and alimony you’ve received.
Turning to adjustments, here’s a brief list and description of common adjustments accounted for in your AGI:
- Certain expenses incurred by performing artists
- Certain expenses paid by teachers for books, supplies, and other equipment
- Certain travel expenses paid by members of the reserve components of the armed forces
- Losses from the sale or exchange of property
- Some costs associated with rental income or royalties
- Qualified retirement savings
- Jury duty pay remitted to your employer
- Clean fuel vehicle deductions
- Moving expenses
- Student loan interest
- Higher education expenses
- Health savings accounts
Why AGI Matters
Why does your AGI matter? Well, the IRS uses your AGI to determine whether or not you qualify for certain deductions and credits. For example, the IRS allows you to deduct medical expenses that exceed 7.5% of your adjusted gross income. In another example, qualifying for the Earned Income Tax Credit means falling under the income limit that applies to you, and all are based on adjusted gross income.
There’s yet another term you might hear thrown about, one used for a few other tax calculations: Modified Adjusted Gross Income (MAGI). MAGI refers to your AGI with modifications. What these modifications are can vary and the tricky thing is that there’s not a single MAGI—there are various MAGIs used for different purposes. And each comes with its own set of modifications. A few common modifications include tax exempt interest and the excluded portion of Social Security payments.
You should be cognizant of what you expect your AGI to be at the end of the year, particularly if you receive income throughout the year that you do not initially pay taxes on. Knowing what you AGI will turn out to be will help you plan for the coming tax bill. If your tax situation is simple, this probably won’t require much attention. If you and your spouse are both income earners, your AGI will be roughly the sum of your salary less retirement savings.
If, on the other hand, you work an income earning job, pay alimony, run a small business part time and own a rental property, it’s a good idea to think ahead about what your expected AGI is. This will help you know your marginal tax bracket and plan for tax expenses. The last thing you want is unexpected tax bill you can’t pay.Your adjusted gross income is one of the most important figures to know for tax time. Find out how to calculate yours and how it could affect your taxes.
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