The sacrafice will be worth it…
Huge tax lesson today:
My 10k unexpected bill was from taxes. Amazing how the govenment and the tax system works. I have a really good tax guy who knows his stuff well, and he spent about two hours explaining how taxes worked, and I mean REALLY worked. Short story is as follows.
The government found that I had received 27k extra income from a 401k deduction (long story, but it was a legitimate over sight during that tax year). When people say don’t touch the 401 k they are NOT kidding. The results of my making that 27k is that I owe an extra 10k, so I probably only took home less than half that amount and the goverment took more than half.
Why did they get so much of my money? First of there is the 10% penalty off the top, then the regular taxes. I counted on that, but here is where it gets insidious. the extra money put me into a higher tax bracket at which point the following happened:
- Higer alternative minimum tax.
- Fewer allowed deduction.
- Higher tax rate
I was completely blown away. I was only over my original tax bracket by $2,000 or so, or roughly 10% of the amount of extra income (which the government took back immediately).
Now the relevance of this is that I had to sell my tickets, AND I lose out on 10k I could have used for investing. My taxes from last year and this year are very straight forward, so I should have no unexpected hits.
This reinforced the fact that I should be clear on the tax implications of EVERYTHING I do before starting real estate. At a certain income level, certain deductions go away (I never knew that), so tax planning will be key. i know others say just jump in and buy something, but I don’t want to keep making these sort of mistakes. So two lessons learned:
- Keep accurate records of what you do, and make sure you can find the paper work come tax time. (the original cause of this issue).
- Know your tax situation.
- Keep accurate records (bears repeating)
This does not quite make sense. You did not report the $27K in the first place, then when your tax return is recalculated with the $27K included, your tax liability went up $10K. The arithmetic says you kept $17K, so how did you take home less than half?
So two lessons learned:
- Keep accurate records of what you do, and make sure you can find the paper work come tax time. (the original cause of this issue).
- Know your tax situation.
- Keep accurate records (bears repeating)
Don’t forget the biggest lesson of all in this scenario – don’t touch the 401K.
When I took the money I asked them to take taxes out at that time (around $5k) The additional 10k tax liability, meant the kept 15k I kept 12k. Horrible deal.
Don't forget the biggest lesson of all in this scenario -- don't touch the 401K.
Well with a wife and three kids and a mortgage and no job, I had little choice. This is also why my credit was shot. Part of this plan to not fail is to keep myself form being in that sort of situation again.
Jay,
Just thought I’d mention that as you pay off/down the cards don’t close the accounts. It will help your credit worthiness to be able to demonstrate your good credit management skills over several accounts (within reason of course).
Having Zero balances on your cards is nice but all you really need to do is keep the total Debt to Credit limit on your cards below 33% - this will actually look better than a bunch of accounts showing a Zero balance and no activity. The 0% card idea is a good one and will also improve your “Debt to Credit” ratio as you are increasing your Credit line but maintaining the same debt (it will also pay down faster).
The other thing that will improve your credit worthiness appearance is credit account diversification (i.e., different types of accounts that will also demonstrate to a lender your great ability to manage credit).
Keep in mind (as I think you already know) that lenders typically look at your FICO Mid-score not necessarily the Credit Bureau scores - there is a difference. Credit reporting bureaus are not “FICO services.” I have heard some people say there was as much as 80-pts difference at times. It has been my experience that Experian’s Plus Score comes very close to the FICO numbers.
As far as lenders seeing scores that are lower than the ones indicated on your credit reports - this directly relates to what I was saying about the FICO number vs CR numbers. To see your FICO number you can do the MyFICO.com thing - there are probably others to choose from as well.
You will also find that the Combined Credit Reports will not be up to date except for the bureau’s report that you ordered from. They rely on past reports from the other two companies that are not always current. I suggest going to each individual credit bureau to monitor your progress and insure your getting the true story.
I would also consider creating an entity structure (like an LLC) - there’s a lot good stuff on this in the Asset Protection forum and you can set it up for a few hundred bucks. Developing a separate business credit portfolio/lines of credit will also help a great deal in the long run (i.e. separate from your personal credit). If your buying multiple homes every year and the lenders are pulling your credit reports every time you buy, you’ll be taking a 5 to 10-pt hit on your credit scores for every inquiry made over 2/year. The separate business credit lines are ultimately the way to go and take about a year to develop to the $200K level (that’s trade lines and cash lines).
Gary,
That will be my next step after paying down my credit cards. Whats great, is that I don’t have enough to pay them all down, but I paid the highest interest ones first, and will have between 20-30% of my credit line remaining on the last one. Which will get me what I need.
I had not thought about doing the LLC with the purpose of developing credit lines for that but I think its a great idea. And one I will pursue over the winter. The one thing I am realizing is that I will need lots of different people to help me (my team). My tax man is the BEST with taxes/strategies, but when I asked him about corporations, I could tell that he wasn’t comfortable with that. So time to find someone to be my corporation lawyer and/or accountant.
Jay
Your credit score can go from the mid 5’s to mid 6’s in like 3 or 4 months easy and then back down again just as fast. i saw my score go from 642 to 721 in about 2 months. you dont need $0 debt to invest. its good to show a small balance and good payment history on it. to get your score up… make sure all revolving accounts are less than 50% of the accounts credit limit. high balances really lower your score. it sucks. make sure ur collections are paid. you cant get rid of them if you still owe. its possible to get rid of them. i had a 60 day late notice on my report once with a department store card. i called and just simply asked them to remove it. and they did because i was honest when i told them the situation. gotta get the right person on the phone to do it tho. because the first time i asked them to do it, the jerk wouldnt budge. most private lenders i see require atlease 620 for their programs. if its less they do it case by case. the hard money lender page here is awesome. you have a great plan. make sure you have plenty of cash on hand to face hard times.
Update:
After selling my PSL/tickets and paying off my credit cards (as much as I could). I am still two months away from having my largest card paid down to 30%. I now have no tickets, and still have CC debt, and to be honest I feel like crap.
Yesterday was Sunday and a PERFECT FOOTBALL DAY. I normally would have been at the field by 2pm, game starts at 4:15pm and ends around 7:30pm. I would have had my daughter with me and we would have had a great time. On top of it all the game was good (I caught the end of it on TV). I am just amazed at the dooldrums I am in over these tickets (I had them for almost 10 years and were one of the pleasures I REALLY enjoyed through out the years).
I just thought I would post because this is the hard part. The giving up of something you enjoy with the faith that it will lead to something better. Rather than go to the game, I got a new battery for my truck, cleaned up the garage, washed my truck and did some additional realestate reading, but I WANTED to be at the game.
People were asking me, “Did you go to the game?!! It was great wasn’t it?” I then inform them that I no longer have the tickets. And they immediately look at me what wonderment, as if to say “Why did you sell them?”. Sometimes they ask sometimes they don’t. I hate those discussions…
So rather than focus on the negative, I try to focus on the positive. I have two less bills to pay this month. I am ahead of my bill payments for the first time in ages. I will be able to put away $250 a month, I can start my 401k again at work, no more “if we didn’t have those tickets we could do X arguments with the wife”. When I had to buy my battery yesterday, I didn’t worry about who was NOT going to get paid on time. I went window shopping for 50" big screen plasmas, and felt good knowing I could take one out of the store (on credit today, and with cash a year from now. No I did not buy it.) And I must say that part does feel good.
Just thought I would let others know the emotions involved, because money is an extremely emotional subject. It takes being willing to confront those emotions to make the big step, and it makes you ask yourself “What would you give up for your dream?”
Jay
Alright…
I have been checking my credit reports and I don’t see the last two months payments listed. I am a bit miffed about this because I want to see the effect on my credit score.
As it stands, I am slowly tweaking my strategy, and I think I have the wearwith all to save $500 and pay $500 on my remaining credit card each month. I put away $500 where it will be hard for me to get at it, and to be honest it feels pretty good. The angst over the tickets has all but left.
At anyrate, my little investment kitty is starting to build.
Oh, and I started reading Propertymanager’s book. He really doesn’t hold anything back, he talks about having to deal with drug dealers, and people messing up the house, and setting a realistic goal for income, he even gives a sample business plan. If your goal is to own rental property you can’t beat this book, so far I haven’t seen anything like it. It almost makes reading the other book I was reading feel like a waste of time, but I guess I needed to read those so that I could appreciate what I am learning in this book.
At anyrate, the progress continues…
j
Jay…I have been reading your posts with interest. This may be a bit off the subject, I am brand new to this forum (like this morning). But I too am trying to tackle a LOT of debt. I’ve been using a program that I bought and learning to manage my money. One thing I’ve learned is we have to change our attitude about money. The cascading debt plan is really the coolest thing I’ve ever seen. I have been using my program since June and have already paid off 3 credit cards (Dell, Lowe’s & Chase) with balances totalling over $10000. One of the things I did was use some cash value on an insurance policy to pay off the largest of these ($7400). Then if anything ever happens to my ex (the insured), they just subtract the outstanding loan from the insurance benefit. Anyway, as part of the financial program I am using, I have a coach I talk to once a week, he assigns me homework, to include reading and getting a grip on where my money is going, and now I am interested in learning about real estate investing. My plan is buy houses and fix them and flip them. Now I know this involves risk, but I think if I learn as much as possible and get advice from seasoned professionals in the area, I will be successful. I’m a single mom, nurse and I love my job, however someday I’d like to work less at the hospital and do the house rehab thing…I don’t plan to make millions doing this, but I want to replace at least half of my income and get totally debt free, and have control of my financial future. I wish you luck with your plan, it’s very exciting to see your dreams come true…
I agree 100% it is a change in attitude. And as soon as I sold my tickets I felt it… I still have another hobby, but I am going to hold on to that for the time being. I may even give that up, if the time is right.
Well I received another boost to my credit its not 637… What’s REALLY starting to p!$$ me off is that my large payments and payoffs are not showing up on my credit report.
One other thing, a credit card company tried to charge me interest AFTER the balance was zero. $12 just showed up on the balance. I called and had them remove it ASAP. If I had not watched that, it would have been a late payment fee, and possibly 30 days late. Man these credit card companies are straight gangsters…
j
Interest still accrues from the end of the previous statement period to the date of your balance payoff. If you carry a balance, there is no grace period for balances carried over to the next statement period. For the statement cycle when you paid off your credit card balance, you still accrued interest on your average daily balance even though you paid the balance in full.
If the credit card company removed the interest charge, they may have done that as a good will gesture.
If you ask for a payoff amount, and you pay that payoff amount, and then your balance is zero., how is the interested generated?
j
Thought I would just talk about motivation for a second.
I titled this post “Plan not to fail” because I avoid succeeding, unless I am under pressure. I know myself well enough that once I start down a path, its mainly to prove that I can do it. When I get going, and I can see the end of the journey, I will often times stop going in that direction and seek a new one. I know when I get to the point that I am going to succeed and then I will jump off train.
Well I hit that point two days ago. I was saying hey, I have all the ends covered. I bought propertymanagers book, I started looking for homes in my area, and it hit me that I REALLY CAN INVEST IN REAL ESTATE. My normal reaction is to stop going in that direction, and to take up the new challenge, and what precipitated my stopping this time is propertymanager’s book. He talks about dealing with dope dealers, crack heads, running crack houses and getting phone calls(some of the stories are funny because I wasn’t the landlord). But then I let the stories marinate for a bit, and said to myself “I know I can do this, but I don’t want to deal with the tenants”. So I decided to stop pursuing real estate.
I was losing my motivation and I knew it. So I decided to go back to the motivation that started me on this path in the first place, Robert Kyosaki. I popped in one of his older DVD “60 minutes to becoming Rich” or something like that, and I was starting to feel the motivation again. Its amazing how seeing Kyosaki draw his boxes and talk about his rich dad, motivates me to keep pushing forward.
I work in washington dc, and drive through some pretty crappy neighborhoods and I started to ask myself, could I go to these places and collect the rent. The answer was yes. And then as I started thinking about collecting rent I noticed for sale signs (something I had never noticed before). I also noticed that some were residential and others were business, and there was renovation going on. All things I had not noticed before.
Long story short, if you lose your motivation go back to your roots and find what motivated you initially. Don’t let the urge to give up, put you down and keep you down.
I must not fail…
Good point.
We are all human beings and have our ups and downs. We need to find the one “thing” (family, in my case) that we hold dear and is the cause of hard work and sacrifice. I believe it is crucial to have that one element to hold on to when we feel like letting up. That deep rooted desire will allow us to rise to the occasion and overcome any obstacle.
Update:
One of my paid off credit cards finally showed up on the credit report. Credit score up to 640. Man I really thought it was going to take until next summer to get to 650 but if this keeps up, I will be there by Christmas.
Jay
The CC company knows you paid off the card, but was an "active customer for awhile. They hope that if they sacrifice the $12 now, you’ll be happy they did that and will keep your card active - not close it - with the possibility of you using the card again in the future.
Sacrificing $12 now for the chance at hundreds or thousands in the coming years.
Keep at it Soho. I went through what you are going through 15 years ago. There is a light at the end of the tunnel. You’ll make it.
However I agree with some of the other posters. I would strongly consider getting active in the RE community now. Join your local REI club. Starts networking with investors in your area. If you are not ready to buy now, you are still laying the ground work. Besides, there is a good chance you might find a deal you can wholesale. I bet a $10k cash deal would do well on your debt situation.
Good luck
Interest is calculated at the end of the statement period on the average daily balance for the entire period. Let’s say you paid the balance in full on the fifth day of the statement period. At the end of the billing cycle, you will have five days with a balance on which interest will be charged.
Because the balance was carried over from the previous statement period, there is no free grace period here.
Did this clear it up?
yes that explination clears up why the interest was generated. But why is that legal? You ask for a payoff on your home on the 5th, they give you the interested owed until the 5th in the calculation. Why are credit cards allowed to wait until the end of the month to charge the interest? Also what happens if you pay off the card and then close it?
I don’t understand how the credit card companies can be so deliberately devious in there dealings with people. I am really glad I am paying them off. On a side note, I have TWO credit card payments due in October!!! I have NONE due in November. After hearing this I asked my person if they have the payments scheduled out for one year in advance to which she said yes, and she then gave them to me over the phone. Interesting bit of data, most of the dates are due on the first or second of the month but there is one or two that are due on the 30th or not due at all in a month. Enough to trip you up if you are paying people close to the vest. That said, I am paying the minimum due 3 weeks early, and then paying my payoff amount later in the month.
I am posting all of this information so that others can realize that if you can’t handle your personal finances with certainty then there is no reason to go into business as you will fail. And it is a radical change for me in the way I manage my life and finances. I always lived by pay at the absolute last moment, and if one thing went wrong, I was late. If multiple things went wrong I was 30 days. When I think back on it, I am extremely pissed at myself for all the money I have lost in late fees, default rates, and higher interest because of low credit scores.
j
The difference is in the way the interest on dfferent financial instruments are calculated. Some - like most mortgages, checking and savings accounts - are calculated on a monthly basis. Interest is thus applied once a month. Most credit card and revolving credit accounts are charged daily or in a few occassions weekly. Some loans and savings accounts have their interest applied quarterly - every three months.
It is one of the factors that reading the fine print on any loan. Also, while many people dismiss APR - it is a valuable tool. APR takes into account not only fees but also the time frame the account takes in applying interest.
The more often the interest is applied, the worse it is for the payor and better for the payee, whether it be a loan, a credit card account or a mutual fund. This is because every time interest is applied it adds more to the amount due. So in a credit account, the amount due increases incrementally daily.
Details we should all be aware of on all of our financial accounts.