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What is the Best Way to Manage My Debt?

What is the Best Way to Manage My Debt?

BY DI IORIO & DI IORIO ACCOUNTING FIRM

 

As a general rule, you should always strive to have as little debt as possible.  The reason is that interest expense is a cost that adds no value to what you own.  It is only a usage fee that you pay to use someone else’s money.  It can be compared closely with a penalty that is paid to a government much like a parking ticket.  You really get nothing for it other than the opportunity to use someone else’s money.

Having no debt, or reducing it as much as possible will save you interest charges and other charges that are associated with someone else owning or having liens on your property; such as insuring and preserving assets to the satisfaction of lenders instead of having the absolute freedom to do whatever you want to do minimally as the sole owner.

A great example of this was when my associate asked me: “Should I pay off my car loan now with this extra $5000 that I have?”  My answer was yes, because the interest rate of the car loan (5%) is higher than the risk-free rate of return on an investment such as a savings account (0.5%).  The difference between 5% and 0.5% is a net interest cost of 4.5%.  Your annual guaranteed savings will be 4.5% times $5000 equals $225.  Plus- there is a bonus.  When you pay off the loan, you can remove the lender entirely from your auto insurance policy and raise your collision & comprehensive insurance deductibles – this will save you extra money.  (In the case of auto leases there are even more additional costs such as excess mileage fees and the cost of mandatory repairs for every little dent and scratch when the car is returned.)

In the case of credit card debt; including store credit cards; you should do everything possible to avoid it because of the egregious interest cost that it carries.  Many credit cards charge 26.99% interest.  If you have a $1500 balance, your annual interest cost will be over $400.  Often these credit cards entice you to carry the balance by requiring small minimum payments that represent interest only.  Imagine if you have credit card debt of $20,000?  You annual interest cost would be over $5000!

Mortgage debt is usually a mandatory debt that most people have to incur because real estate is expensive and usually beyond the regular means of a home buyer.  There are two golden rules:

  1. Make sure that your debt maturities match as closely as possible with the economic lives of the assets to which the debt was incurred; and,
  2. Make sure that you have obtained the lowest possible interest rate. Sometimes the achievement of number 2 will require you to take a fresher look at number 1.  Specifically, in today’s low interest rate environment, an adjustable rate short-term mortgage loan will run at a substantially lower cost than a 30-year conventional mortgage.  Therefore, when you see that a 3 to 5 year time horizon will have an interest cost of 1.5% as opposed to a 30-year lock rate at 3.95%, given a large sum of debt of say $250,000 (5-years of college education for instance), your savings by choosing the short rate of 1.5% would be about $6,000 per year; over 5 years it could add up to $30,000. So being creative with term in order to get the best possible rate is a smart approach.  The key is to use your imagination to determine whether or not your time horizon can be shortened to justify taking this kind of opportunity.

Student loans follow the general rule stated above at the beginning of this article: avoid it.  These loans are deceptive in that even the best “Federal Stafford Subsidized” student loans charge interest at rates that are much higher than the risk-free rate. Presently, this best rate is 4.29%. Beware that most student loan monies are not “Federal Stafford Subsidized”.  Many of these other student loans are not recommended by Veritas Financial is there are good alternatives to having them.

Student loans are typically granted to borrowers as a package that looks like “financial aid”, but deep down, they are not “aid” at all.  They are instead just like explained above, an opportunity to use someone else’s money at an above-market and sometimes usurious cost.  The “financial aid” moniker is quite deceptive.  Truly student loans need to be better governed by consumer protection laws and made more transparent to the student consumers.  Watch out for student loans that charge you interest at high rates even while you are still attending classes!!!  This area has become a predatory one where lenders directly; and universities indirectly are profiting from unaware consumers.  We have observed that student loan debt information that is provided to borrowers is deficient and lacks important information (such as detail history with dates of accrual, and dates of advances) that a borrower needs.

Student loans have received some congressional support mainly for the sake of the universities and lenders – unfortunately NOT for the borrowers/ students.  Tread carefully in this area. What looks like an obvious choice to freely spend on education is another mine-field for smart consumers.

 

This short report is an informational service provided to you by Di Iorio & Di Iorio Accounting Firm, located at 567 Park Avenue, Suite # 203, Scotch Plains, New Jersey.  Visit us at www.diioriocpa.com

Our professional debt and finance experts have the experience and tools to help you to structure and implement a debt reduction plan and the best of debt management plans. 

“Another way to control and improve your financial future “

Call us at (908) 451-2016.  We are available day, evening, and weekend hours.

 

PROTECT THE FAMILY FINANCES

PROTECT THE FAMILY FINANCES

BY DI IORIO & DI IORIO ACCOUNTING FIRM

 

When people become older or disabled, they often are unable to manage all of their important financial matters.  Rather than depending solely on their children for the best control over their finances, families should consider using the assistance of a professional who is an expert with proper organization and control over personal finances.

During times that the children of elderly parents are struggling to take care of the health of their parents, or when they are busy or distant with running their own lives and families, proper care is also needed in the area of giving attention to the broader family’s crucial financial matters and decisions, timetables, deadlines, coupons, conversions, renewals, expirations, etc.

Di Iorio & Di Iorio has been implementing the best financial management tools and offering guidance for families for over 25 years.  We have teams who will work closely with families to professionally install financial management software with the appropriate password controls for the responsible family members, organize the accounts and data structure, and train all of the users for the appropriate upkeep.  The financial management software that we install and implement handles all assets and liabilities including real estate and investments.  The programs are fully supported by the software manufacturers, as well as by our professional staff.  We have client sites that are running with 25 plus years of data still intact and interactive!

The primary strength of our implementation is the result of quickly showing a one-page, up-to-date presentation of each and every asset and liability that a person (or a family) has.  There is some work and discipline to maintain this, but it is a very worthy task that fulfills the objective of protecting the family finances.  The work and discipline are provided by proper training and periodic reviews by our professional staff.

Having a current and correct report of all financial matters is an essential “blue-print” to avoid losses, missed opportunities associated with unexpected tax issues, unclaimed insurance benefits, lost financial benefits, and risks of losing control over papers and related financial matters.  The February 26, 2016 Wall Street Journal had an article by Leslie Scism entitled: “Why Decades-Old Life-Insurance Benefits May Still Go Unpaid”.  The article presents important facts about how some life insurance companies are balking about paying claims that are long overdue according to death databases, while some states are requiring the payouts.  This incident occurs only when the beneficiaries and family members have no knowledge about the policies and thus no claim is made.  The article talks about over $7.4 billion in such payouts since the states have gotten involved in this kind of enforcement.

A current and maintained personal finance program that your family can share will provide the information necessary to enable you to control against these and many other kinds of financial risks.  Our program not only presents to any reader what you have on one page, but it also enables you to get snapshots with drill-downs “on the fly” to tell you what happened (spending or income), and where it happened (which bank account or credit card) over any period.  Just imagine that at tax time you can simply click one or two buttons and you will get a complete listing of every check and credit card charge that you incurred on charity, medical expenses, etc.

Di Iorio & Di Iorio strongly recommends that every household keeps a “master control” over its family finances.  We can either; do the work for you by maintaining all records, or educate/ train you on proper installation and implementation.

Di Iorio & Di Iorio Accounting Firm’s offices are located at 567 Park Avenue, Suite # 203, in Scotch Plains, New Jersey.  Call us at (908) 451-2016, or visit our website at www.diioriocpa.com.

 

 

 

Why File Your Income Taxes Early? And, Why File Electronically?

Why File Your Income Taxes Early? And, Why File Electronically?

BY DI IORIO & DI IORIO ACCOUNTING FIRM

Once you have received all of your tax documents it is a good idea to file your return, rather than wait until you get closer to April 15th or an extended date. It is essential that you know that you have all of your tax documents and that they are correct.   Di Iorio & Di Iorio can help you to make this determination.  Our tax professionals will help you to be assured that you are paying the lowest and correct amount of tax allowable, and filing within the most appropriate time-frame without errors and with the minimal amount of risk that you will be selected for audit.

First, have your tax returns prepared by a professional; preferably a CPA.  Next, review your return carefully including a two-year comparison with last year.  Finally, file it promptly. The principle reasons to file electronically and promptly are:

  1. You will get your refund faster. If you e-file and authorize direct deposit, you will get your refund in about 18 days. Why let the government have your money that you can put to good use at your own direction?
  2. Our tax professionals use tax software that provides reviews and audit alerts so that your tax return is virtually audit-proof. You receive an electronic acknowledgment from the taxing authorities that your e-filed return was received by them.
  3. You will know where you stand financially, as to the extent of your current tax refund or liability, giving you fiscal control over your budgets through April.
  4. You will “check the box” and have a mandatory task put behind you. The feeling of a little bit of freedom is a good one for most people.
  5. Financial Aid Forms often require early income tax filing. FAF administration is also linked directly with IRS.
  6. Once last year’s tax is done, estimated taxes for next year are readily determinable and again- better fiscal planning is achieved in budgeting for next year’s taxes.
  7. Filing with the masses and electronically in February-March puts your return in a bulk collection/ process making it less probable for audit selection than returns which are handwritten, sloppy, late, or extended, as they are in smaller distinct batches.
  8. Even if your hand-written tax return is perfectly correct, an extra potential source of errors in your return at the Service Center may occur from IRS data entry or other mishandling by IRS personnel and equipment or processes.
  9. On the subject of mishandling, another potential pitfall is when self-prepared tax returns use tax software which does not correctly align W2 and 1099 box entries with the requirements of the tax code, resulting in erroneous results and likely overstatements of income. There is no substitute for the experienced eyes of a professional tax preparer.
  10. You eliminate all risk of late filing penalties and associated interest. You might think you’ll have plenty of time to prepare your return on April 14, but you can’t predict what life might throw at you.
  11. What if I have to pay? Our recommendation is that you promptly e-file your tax returns with a scheduled automatic withdrawal date of April 15th.  The government will debit your bank account timely and accurately, and you will have a clean audit trail.  This is a sure way to have one of your key fiscal responsibilities compliant and under control.
  12. Filing early eliminates mistakes that are made from rushing.

 

This tax instruction column is provided as a courtesy of Di Iorio & Di Iorio Accounting Firm, located at 567 Park Avenue, Suite 203, Scotch Plains, NJ 07076; Emilio A. Di Iorio, CPA, CVA, proprietor. We are available day, evening & weekend hours to answer your questions.  Call (908) 451-2016 or visit us at www.diioriocpa.com