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Posted by Andrew on September 8, 2007, 1:20 pm
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I pay taxes three times a year (Mar, Sept, Nov) - school tax, property tax,
and home insurance premium (not a tax of course, but I am plan for it as
such). I have a "tax savings account" that I originally calculated 'x'
amount of dollars to be put in from each pay check via direct deposit, and
of course, I have Quicken do the split for my paycheck deposit (had to throw
'Quicken' in here somehow!).
Now over the past year or so, the amount of taxes have changed (gone up, of
course!). Does anyone have a good way of figuring out how much I should be
saving each pay check to cover the cost of these three expenses so I can
spread it out over the year evenly? Because I am withdrawing big amounts
three times a year, it's not immediately obvious to me how to do this
calculation given what I started with, the timing of the withdrawals, what I
currently have in the account, etc.
I suppose I could try to cover any increase (or decrease) in any bill by
proportionally altering the contributions to the "tax savings account", but
I really don't even know if I started with the correct figure when I first
'seeded' the account. I've managed over the past 2 years to not have to
borrow against 'real' savings, but I'm not sure if I'm cutting it too close,
or not close enough.
Perhaps someone has a nice algorithmic method? I know when I did have a
mortgage I used to receive an escrow analysis from the bank each year, and I
could never figure out how they came up with those #s! I think this is a
little more difficult than it seems on first glance, no?
--
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Regards -
- Andrew
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Posted by R. C. White on September 10, 2007, 11:39 am
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Hi, Andrew.
If I asked you, "How much is $100 + $200 + $300?", you could easily use
arithmetic to calculate the exact answer. If if I asked, "How much is about
$100 + $200 plus a little allowance for inflation + $300 or more depending
on what the city council does?", you can't calculate that without more
information. And what you are asking Quicken (or us) to do is make a
mathematical calculation based on approximate numbers generated by
educated(?) guesses about what the future will bring. Can't be done.
:>( But it has to be done, and each person saddled with the job will come
up with his/her/its own formula. Here's one:
The starting point is to determine - by guess or otherwise - how much each
of the bills will be in the coming 12 months. Divide each by 12 and add 'em
up. If you get paid weekly or on some other schedule, divide the annual
amounts by the number of paychecks in a year (24 if semi-monthly, 26 if
bi-weekly). That's your starting monthly contribution to the account.
Then multiply the monthly school tax amount times the number of months
(paychecks) until the next payment is due (Mar? Sept? Nov?), and do the
same for the other two. Add 'em up. That's starting balance you need in
the account. (My insurance company issues semi-annual policies, so they
come due twice a year; I would take the expected next premium amount, divide
by 6, and multiply by the months to the next semi-annual payment.)
And, of course, you probably want to add a "cushion" to be sure that you
don't get surprised by an unbudgeted jump in the tax. A small jump should
be no problem; if the first tax goes up few bucks, you'll use some of what
was put in for the other two. If you were a "trustee" or other fiduciary,
it might be a no-no to commingle funds like this. But this is all your
money, under your control, and under no restrictions except your own
planning. So pay the excess school tax out of the fund, then increase your
monthly payments to make up the overpayment and to have enough in the fund
to cover next year's expected bill - including any further anticipated
increase.
Even the best escrow analysis programs used by the banks miss their guess
sometimes. And then the homeowner gets a bill for the shortage and/or an
adjustment in next year's PITI (principal, interest, tax and insurance)
payment.
The arithmetic is easy. Prognosticating next year's bill is guesswork. And
the easy, precise arithmetic is based on the hard, sloppy, imprecise
guesses. ;^{
RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(Currently running Vista Ultimate x64)
>I pay taxes three times a year (Mar, Sept, Nov) - school tax, property tax,
>and home insurance premium (not a tax of course, but I am plan for it as
>such). I have a "tax savings account" that I originally calculated 'x'
>amount of dollars to be put in from each pay check via direct deposit, and
>of course, I have Quicken do the split for my paycheck deposit (had to
>throw 'Quicken' in here somehow!).
>
> Now over the past year or so, the amount of taxes have changed (gone up,
> of course!). Does anyone have a good way of figuring out how much I
> should be saving each pay check to cover the cost of these three expenses
> so I can spread it out over the year evenly? Because I am withdrawing big
> amounts three times a year, it's not immediately obvious to me how to do
> this calculation given what I started with, the timing of the withdrawals,
> what I currently have in the account, etc.
>
> I suppose I could try to cover any increase (or decrease) in any bill by
> proportionally altering the contributions to the "tax savings account",
> but I really don't even know if I started with the correct figure when I
> first 'seeded' the account. I've managed over the past 2 years to not
> have to borrow against 'real' savings, but I'm not sure if I'm cutting it
> too close, or not close enough.
>
> Perhaps someone has a nice algorithmic method? I know when I did have a
> mortgage I used to receive an escrow analysis from the bank each year, and
> I could never figure out how they came up with those #s! I think this is
> a little more difficult than it seems on first glance, no?
>
> --
> -------------------------------------------------------------
> Regards -
>
> - Andrew
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Posted by Andrew on September 10, 2007, 8:32 pm
Please log in for more thread options R. C. White wrote:
> Hi, Andrew.
> (etc. etc. etc.)
R C - thank you! I'll take your post and review over the weekend. I kinda
of manually did my first pass, and man, and I wrong! I think it takes a
full year to understand what the cash flow does over the three periods of
dispersal; well, glad I over estimated so if I lower now, it will be on the
good side of adjustments. The #s I plan to use aren't much different from
last year except for a little fudge factor in that bills always go up!
Tnx agn!
--
-------------------------------------------------------------
Regards -
- Andrew
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Posted by Ronald Pierce on September 11, 2007, 12:42 am
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<snip>
>Perhaps someone has a nice algorithmic method? I know when I did have a
>mortgage I used to receive an escrow analysis from the bank each year, and I
>could never figure out how they came up with those #s! I think this is a
>little more difficult than it seems on first glance, no?
Andrew,
I have been doing this for years now - works well. My initial concept
came from a finance book called: "Uncommon Cents" by Lynn G Robbins -
Been doing this since I read the book back in 1994. It has some nice
charts that are easily transfered to a spreadsheet to give you the
monthly expense layout and average along with a monthly expected
balance in the savings account to ensure it doesn't go negative during
the year.
Additional information was gathered and used from a post by Dick
Weaver back in Sept. 2000. I tried to google his original post - but
it wasn't found. I will include some of his post below.
Anyway - I focus on periodic expenses (Christmas gifts, car
insurance, house insurance, etc). These are big hits at defined times
- I know that March and September are car insurance months, May is
house insurance, and December is Christmas month, etc. In this case,
I add up my total periodic expenses and divide by 12 to come up with a
monthly amount needed to save in order to have that savings cover all
the periodic expenses for the year. I set that amount up to be
automatically sent to a savings account each month. When one of the
periodic expenses comes due, I transfer from savings to checking the
amount of the bill and pay it. I know I have the $$ in savings to pay
each and every periodic expense.
Words of warning - I work on a January to December basis, paid
monthly. Say you have a $2000 car insurance bill due on February, but
your monthly savings amount only averages $500. You obviously won't
have $2000 (only $1000) in February. In a case like this, you may
need to have some cash in savings the first year to cover this
shortfall. The nice thing about this is that at the end of the year,
you still have your same amount of savings - ready to fund your early
shortfall needs - you saved for and spent all the $$ added to the
account throughout the year. Alternately, try to move some of the
large, early bills to later in the year if possible. Additionally,
unless you don't have expenses at the end of the year, may mean you
should shift your January to December basis to some other months - but
in most cases Christmas costs and House Taxes take a good chunk of
December periodic expenses.
I use a spreadsheet to track this - similar to the information below -
from Dick Weaver's post.. Make sure view it with a fixed-witdth font
so the columns line up.
< Begin Dick's Post >
To start, we'll use pencil and paper to make a grid of payments
(you can use Excel if you want, but pencil & paper is adequate).
A row for each payment. Columns correspond to paychecks; entered
in a column are the payments to made when that paycheck is
received. 12, 26, 52, ... columns matching your payroll. We'll
use 12 for examples.
For example, if you receive paychecks at the end of each month
and have a payment of $250 due June 20, then record that bill in
the 5th (May) column - the money to pay this bill must be
available when the May check has been deposited - the June
payroll check cannot help. The $250 payment will be written when
the May paycheck is recieved even though you may not mail it
until June 10 or so.
Our completed grid looks something like this
1 2 3 4 5 6 7 8 9 10 11 12
0 0 0 0 0 0 0 0 0 0 0 0
.... .... .... .... .... .... .... .... .... .... .... ....
AutoIns 0 0 400 0 0 0 0 0 400 0 0 0
Vac. 0 0 0 0 0 2400 0 0 0 0 0 0
PropTax 0 0 0 0 0 0 0 0 0 0 1200 0
LifeIns 0 100 0 0 0 0 0 100 0 0 0 0
Util. 200 200 150 130 80 20 40 50 70 120 160 180
Notice the inclusion of utility (gas, electric) payments. Even
though the exact amounts are not know, the approximate amounts
are and if we don't provide for utility costs then the large
differences (almost $200) may have us feeling broke in the winter
and flush in the summer.
Total the columns
200 300 550 130 80 2420 40 150 470 120 1360 180
Total all columns 6000
So we average 500/mo in payments
Assume a beginning January balance of 0 and calculate the ending
balances for each month
1 2 3 4 5 6 7 8 9 10 11 12
Jan 0
+500 +500 +500 +500 +500 +500 +500 +500 +500 +500 +500 +500
-200 -300 -550 -130 -80-2420 -40 -150 -470 -120-1360 -180
end 300 500 450 820 1240 -680 -220 130 160 540 -320 0
Well, the ending December balance, 0, is the same as the starting
January balance so we likely did the math correctly. The
negative ending balances, however, tell us that our assumed Jan
beginning balance, 0, is not correct. It should be 680, the
largest negative balance. So, try again
1 2 3 4 5 6 7 8 9 10 11 12
Jan 680
+500 +500 +500 +500 +500 +500 +500 +500 +500 +500 +500 +500
-200 -300 -550 -130 -80-2420 -40 -150 -470 -120-1360 -180
end 980 1180 1130 1500 1920 0 460 810 840 1220 360 680
Better. Putting together with our original grid, we have our
complete picture:
1 2 3 4 5 6 7 8 9 10 11 12
0 0 0 0 0 0 0 0 0 0 0 0
.... .... .... .... .... .... .... .... .... .... .... ....
AutoIns 0 0 400 0 0 0 0 0 400 0 0 0
Vac. 0 0 0 0 0 2400 0 0 0 0 0 0
PropTax 0 0 0 0 0 0 0 0 0 0 1200 0
LifeIns 0 100 0 0 0 0 0 100 0 0 0 0
Util. 200 200 150 130 80 20 40 50 70 120 160 180
Jan 680
+500 +500 +500 +500 +500 +500 +500 +500 +500 +500 +500 +500
-200 -300 -550 -130 -80-2420 -40 -150 -470 -120-1360 -180
end 980 1180 1130 1500 1920 0 460 810 840 1220 360 680
< End Dick's Post>
Basically - once you seed your account in January so that you never go
below 0 - you will always end the year with that amont in the account.
I will adjust things at the end of the year for the following year.
Yes, the amounts may go up - but not that dramatically - and my large
payments are not in January or February - so there is always enough to
cover the increase.
Chew on this a bit - hash out a spreadsheet and go. You will always
have the amount required in your savings account. Reading RC White's
response - this is basically the same thing - but giving you more
spreadsheet layout to go by.
- Ron
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Posted by Andrew on September 11, 2007, 7:44 am
Please log in for more thread options Ronald Pierce wrote:
>
Ron - thanks - I do remember that thread now that you requoted it. Since I
get paid semi-monthly, the easiest thing is to figure out what the yearly
expenses are and divide by 24 and use that amount each paycheck, but as
we're all well aware, that doesn't work if your first big expense is just a
few months after you start, and assuming there's a starting balance since
I've been doing this now for about a year. In fact, the reason this came up
is my first tax bill was received recently which made me think about how I
need to adjust my thinking/savings plan.
I think I'll do the following with a spread sheet starting next month since
it's almost mid-Sept:
Need a STARTING BALANCE - call it $x.
USE EXISTING AMOUNT OF SAVINGS TRANSFER TO 'TAX' SAVINGS ACCOUNT each
paycheck - $y (initial value I am currently using):
On an EXCEL s/s, I'll have a row continuing the following 4 columns::
(1) Starting Balance: ($x) (from either the starting balance to 'seed', or
the previous end-of-month balance)
(2) Income transferred from paycheck into 'tax' account ($y*2, paid
semi-monthly)
(3) Big Expense in month (if any) to be deducted (for this column, I'll have
3 expenses entered over the year at end of each of the three months)
(4) Ending Balance (start of month (col 1) + col 2 - col 3) (value feeds
into the next month's starting balance)
and replicate the row above for the 12 months. By plugging into the s/s the
expected expenses during the 3 times a year I have to pay, and seeing what
the ending balance is (not avoid "going negative" as Dick said in your
post), I can see what the optimal value of '$y' I need to ensure I transfer
each month will be so that at no point during the year will column 4 go
'red'.
This is relatively simply EXCEL.
I'll let you know how it works out.
--
-------------------------------------------------------------
Regards -
- Andrew
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