I Need My $28 Socks, They Are Not Discretionary!

I’ve spoken about this before: where people go off the rails on their household finances is when they do not have a small Rainy Day Fund for things like brake jobs and root canals AND when they over spend on discretionary items.

Today we’re talking about discretionary items. Clearly, the line between discretionary and non-discretionary is personal, right? Yes, to an extent. Here is my list of Full Discretionary categories when I work with clients and they are the following:

How can fines, diapers, and children’s activities be discretionary? How can junior get into a great college if she is not on the debate team and equestrian team?

Here’s how: If you and your spouse suddenly lost your jobs or could not work, what would you stop doing? Probably everything on the list above. I can see your point on diapers, but here’s the deal friends, in lower income communities, kids are potty trained at 18 months Why? Because it’s cheaper!

I know your health depends on your $28 sport socks, but when the financial chips are down, I think you will make it on regular socks, you may even darn the old ones you have. That’s my point. Anything you would jettison in a financial storm is in fact discretionary.

What’s more is that if you move items from the discretionary category to the NON-discretionary category, it gives you license to SPEND on that category without guilt. It's psychological!

If certain clothes or products are MUST-HAVES, you begin to feel entitled to them. Then, if the chips are down, you do not jettison them and you use yoru credit card for them. Then you are on the slippery slope.

Little Susie will still get into MIT without the equestrian team if her personal story includes the resilience of going through a financial catastrophe with her parents and learning how to prioritize necessary vs. non-necessary things in life. Your child will understand value, trade-offs, prioritizing and good decision-making. She cannot learn that anywhere else, but from you.

Note that gyms and therapy are not in my full discretionary list. The reason is that these would not go even if all income stopped, for many people. Maybe it's the Y and not SoulCycle, but you will still workout if that's a priority for you. For some people therapy is a necessity to keep going.

Know what is discretionary and what is not. That way, you can make good decisions about what stays and what goes when the chips are down AND, more importantly, you can decide which full discretionary items matter and when. You may trade-off those $28 socks, for a night out, because you know you only have a certain amount of discretionary dollars. When you are honestly making those trade-offs, yu are being honest with yourself about your finances and not feeling entitled.

You are not entitled to any and all full discretionary spending, you have to make trade-offs and decide. New shoes, or anniversary dinner? You cannot make that decision if you deem shoes to be required. Remember, you are the adult, you decide the priorities.

Tax Season – How Can You Minimize Your Tax Bill?

Upcoming Event: Personal Finance 101: Take the Stress Out of Your Finances and Make a Plan
When: Thursday, April 14th, 7.30-9pm
Where: DCJCC 1529 16th Street NW, Washington DC
How: Please register ($10) here.
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Tax Season - How Can you Minimize Your Tax Bill?
It’s tax season again and I thought I would take a minute to discuss the main (legal) ways to reduce your tax bill and be good to your wallet as well.

The best way to reduce your taxable income (i.e. the amount of income the IRS will apply your tax rate to), is to have as many legal deductions as possible. Some require you to itemize to receive the deduction.

I do not want get into exemptions and tax credits here as it is very arcane and I’m not an accountant anyway. I just want to talk about some common and easy ways to reduce your overall taxable income that most of you can apply right away. Yes, I know it’s almost April 15ht, but there’s always next year.

The three common ways to increase or create deductions are the following (there are more if you are self-employed, but I will only talk about the ones common to everyone):

  1. CONTRIBUTE TO RETIREMENT and/or Contribute to a 529 plan - no need to itemize to get the benefit
  2. Mortgage interest deduction - need to itemize to get the benefit
  3. Charitable giving - need to itemize to get the benefit

Number one is my favorite way to reduce your tax exposure. If you can manage it from a cash flow standpoint, contribute the maximum you can to your employer’s retirement plan (or yours if you are self-employed). The more you sock away the better it is from a tax and retirement perspective.

Mortgage interest deductions are great, but if you are not a position to own a home for cash flow reasons or because you lack the down payment necessary, this option won’t be available to you. Owning a property that is rented out all of the year, has a different tax treatment than the mortgage of your main residence, which means buying a small place to rent out might not afford you the tax cover you want.

Charitable giving benefits everyone. You get a deduction and you’ve helped a worthy cause. The key to remember here is that not all causes you deem worthy are considered charitable to the IRS. Contributions to a political group or party are not considered a charitable deduction. Make sure the group you want to contribute to can give you a letter with their letterhead, saying you have given a donation to a group recognized by the IRS as being a charitable organization.

Also, remember, your TIME is not a deductible gift even though it is a charitable one. If you help serve meals at a food bank or some other cause where you donate your time, you cannot do a calculation that equates your time to money (like multiplying the hours you volunteer by your professional hourly rate… sorry… no go).

Some other things that help are index funds. If you have investible assets outside of your retirement or 529 funds, you can invest them index funds, which generally, have fewer taxable events (trades) than regular mutual funds where you have to pay taxes on gains from trades within the fund (much longer story, but trust me on this).

I’m sorry to say there aren’t many ways for plain old regular people to reduce their tax bills legally, but if you max your retirement contributions and have a good mortgage, you are way ahead of the game.