I'm pretty good at figuring out costs, determining future values, and gauging things like how interest rates will affect how much I pay on something or how much an investment will pay me over time. Sometimes it's those seemingly simple calculations that can have me screwing up my financial figures though -- and when we're talking about my money, every dollar counts. Therefore, I have to keep a watchful eye on even the financial calculations that seem like no-brainers. An overlooked common sense item could have me paying more than I'd expected and not even realizing it.
Weeks in the Year
I don't know about most people, but I find that the number of weeks in a year tends to throw off my calculations sometimes. Yes, I realize that there are 52 weeks in a year, but in some calculations, I tend to figure by months rather than by weeks, and I tend to look at months as generally being four weeks long. However, taking 12 months, and multiplying them by 4 weeks each only gives me 48 weeks in a year, 4 less than I should have calculated for.
How can this hurt me? Well, let's take our insurance premiums for example. I know that this cost runs us about $153 a week. Taking that cost at 4 weeks a month ($612), and multiplying that by 12 months equates to $7,344. But really that $153 each week for 52 weeks actually comes to $7,956 or a full $612 a year difference. Such calculations could also come into play with income, mortgages, and a variety of other calculations that are stretched out over the period of months or years.
Taxes Owed
Another rather simplistic calculation that has caught me up over the years, but that I'm now on the lookout for, is that of future taxes owed. While it's somewhat difficult to predict exactly what my tax rate will be in retirement -- or even next year for that matter -- I've found that not taking it into consideration at all can skew the results of my asset tracking.
Take for example my IRA. Since it's not a Roth IRA, and the contributions were made pre-tax, I will eventually owe taxes on that money when it comes out as distributions in retirement. Therefore, in my opinion, it's more pertinent for me to negate a portion of this asset total, setting it aside myself ahead of time so as to get a more accurate picture of what my retirement savings actually are. That being said, should the total in my IRA be $30,000, rather than look at this amount as my full total as I used to years ago, I would rather take this number and multiply it by .85, thereby factoring in a 15 percent eventual tax rate when I draw upon the proceeds of my retirement fund. This keeps my totals more accurate and me from overestimating what I will actually receive in benefits.
Additions to the Family
How could I possibly screw up additions to our family? I mean come on, three people, plus one more person equals a family of four, right? But it's more than that, especially when it comes to taxes.
For someone like me, who likes to get a jumpstart on annual income tax planning, an additional family member added at the end of the year, like our second child was, can kind of skew the results of my early tax estimates. Having a late-year addition can add an extra exemption of $3,800 (based upon 2012 tax estimates) will make a significant difference in our taxes owed. Add an additional $1,000 tax credit (in 2022 at least) for this new little person to our family, and our tax situation improves even more. Factoring this second child into our tax planning makes my pre-calculations more exact and helps me make more year-end preparations more accurate.
Disclaimer:
The author is not a licensed financial or tax professional. This article is for informational purposes only and does not constitute legal, financial or tax advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
