This post is by staff writer Honey Smith.
This progress report is full of good news! I will go over each piece and its impact on my life, but the bottom line is:
I paid off my small student loan balance!
Jake paid off the balance transfer he’d made to one of my credit cards!
I got a raise!
I am super excited, as the confluence of these milestones really makes me feel that I am picking up some steam on my personal finance journey.
1. I paid off my small student loan balance
When I initially posted my debts and assets a year ago, my small student loan was in the neighborhood of $5,200 and was divided into two subaccounts for my subsidized and unsubsidized loans. I paid off one of the subaccounts in full in December, and was left with one account with a balance close to $3,300.
My monthly bill for this account was about $50. When I kicked off my book review series in April with a review of All Your Worth: the Ultimate Lifetime Money Plan, I discovered that I needed to be “saving” an additional $300 per month to be in line with the Balanced Money Formula. However, under their system, debt payments beyond the minimum count as “saving.” So in addition to my regular monthly payment, which was already on auto pay, I started making an additional payment of $300 per month.
Then this summer, my side work really started to take off, so my payments were more like $850. My late July payment was my last! Not only have I demolished over three thousand dollars in debt so far this year, but I have improved my cash flow by $50 per month. Huzzah! That means currently my only debt is my large student loan, which has a current balance of $94,067 (anti-huzzah?).
2. Jake paid off the balance transfer on my credit card
When I originally posted my reckoning, I mentioned that the balance on one of my three credit cards was actually Jake’s. At the time, my rates were much better than his, so I let him transfer about $6,000 to a card with a zero balance and a low rate. He never used the card to make any charges, and paid it off over the course of about 4 years. Since I had no need for the card and he made more than the minimum payment every month that he had a balance, he was essentially helping my credit score. Win-win!
Jake’s been making great strides on his consumer debt generally. He’s paid off over $9,000 since last June. He’s also gotten better about taxes. In August of last year, I realized that he wasn’t paying quarterly last year even though his business was his sole form of employment. When I asked him about it and he said that quarterly payments weren’t required, they were a “service the IRS provides,” I sent him about 50 emails with links to the IRS website, including this one which says,
If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
He ended up making at least two quarterly payments in 2012. I think it may have been three, but I’m not positive. We did owe at tax time because he’d underpaid, but it wasn’t as bad as it could have been. This year he has set up a payroll service to do withholding for him throughout the year. He also pays himself bonuses outside of payroll, but he’s been making quarterly payments to account for those, so he should be on track for the year.
3. I got a raise!
OK, so I’ve known that this was coming since I think April. However, I didn’t want to count my chickens before they hatched in my bank account. Additionally, even though I knew how much my salary was being increased by, I wasn’t sure how much it would increase my take-home pay since federal and state tax, social security and medicare would all increase.
It increased my paycheck by about $50! So given that an average month has two paychecks, the raise improved my monthly cash flow by $100. My total cash flow improvement is $150 when taking into account the student loan payment I am no longer making. Huzzah again!
However, my glee was destined to be short-lived. Why? Taxes. In 2012, I did not make enough money on my side work to have to pay in any additional income tax. Now that my business is taking off, however, I am pretty sure that I will owe. I’m not sure how much, but I want to avoid an underpayment penalty. To refer back to my BFFs the IRS,
Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
I have been setting aside a third of my business income and not touching it, so I won’t be short when it comes tax time. But I’m not sure how much quarterly payments would be since my income has fluctuated so much this year. I’d also like to avoid an underpayment penalty.
My “solution” was to adjust my federal withholding at my day job so that my paychecks will be the same as they were before my raise (hey, I’ve been getting along without it so far, right?). While I may still owe a bit in the end, I will have exceeded 100 percent of the tax shown on the return for the prior year, so there shouldn’t be an underpayment penalty. After we do our 2013 return, then I’ll have a better idea of what I should do going forward.
Just one milestone, more to come
This is only one milestone along my marathon journey to financial freedom. There are many more to come (which I say not in a bragging way, but in a this-is-going-to-take-forever way). I’ve already made some great progress towards meeting my goals for 2013. My plan at this point is to focus on saving for awhile. The nice thing about savings is that you can put it towards debt at any time if you change your mind!
What financial goals have you reached lately? What are you still working towards?