I’m a big proponent of using online tools from firms like Mint and Personal Capital to help track your finances, I also use elaborate spreadsheets to keep track of my budgets and cash allocations. For taxes, I love the organizers that make our lives simple from places like H&R Block and TurboTax, plug in your numbers and here’s your answer.
The thing is though, once you start relying on this stuff too much you become mindless, you wander from financial situation to financial situation relying upon goodwill and hoping that others will get it right for you, you become a Consumer. The beauty of becoming a Producer instead is that you are so much more in control of your destiny, you can plan better, forecast and there will be a lot less surprises when it comes to money.
Producing your Tax Report, rather than Consuming a Produced Report
A prime example of this is your Tax Refund, some people have already received theirs and were ‘pleasantly surprised’ why? Please explain the pleasant surprise that comes with having no clue what amount of tax you should pay in one year and being glad when a random number that provides attractive opportunities for Consumer Spending comes along:
“I received $4,000 in my tax refund this year, it was great!”
“Really? Great? What you mean is you had no idea what you were getting, and therefore I could have given you $3,000 and you would have been over the moon – what if you were owed $5,000 and someone made an error on the way?”
Of course, generally speaking, errors like that don’t happen too often, at least from a mathematical perspective. Where the errors occur is in Tax Strategy leading up to the filing. If you are a Producer you are in much better control, you know what numbers you are tracking, and you can see what happens when you increase Deduction X or Decrease Income Y. Being able to see this in advance because the math isn’t scary allows you to pre-plan and structure your finances in a way better way.
Mistakes in Reports Happen when Coding Changes on your Portfolio or Bank Account
I had an experience this year where my Brokerage account omitted a trade that was valued around $6,000. They have a very cool solution where you hit one button and your Gains and Losses for the Financial Year are transferred to a PDF and you submit the total with your Tax Returns on the Schedule D. The trade was a losing one, and the problem came about because I was holding a bunch of Options for Citigroup, however I held them for some months and in the interim Citigroup performed a Reverse Stock Split.
A reverse stock spilt occurs when a stock is trading really low, and they want to bump the price up to a higher number for several reasons: Stocks trading below $5 are not marginable, so by trading below that number some people are not going to trade your stocks, and liquidity drops. Stocks below $5 are also not attractive to large institutional investors, so by performing a reverse stock split they open up the doors for new money to come in and the stock to jump in value (not that this always happens though).
Example – C is trading at $4 with a 100 millions stocks in circulation. They buy back the 100 million at $4 and reissue a new stock at $40, but only 10 million of them. In effect for the owner I lose no value. If I owned 1000 C shares at $4 for $4000 value I now own 100 C shares at $40 for $4,000 Value, same thing, just less pieces of stock.
When it comes to Options (a derivative of the stock) these are contracts to buy 100 pieces of the stock at the market value. When the stock performs a reverse stock split the options have to adjust too, in order to remain in ratio. So my contacts now are going to produce 10 Stocks at $40. This is a seemingly straightforward thing, but the coding for it on the Brokers side needs a little manual labor and the upshot of that was the new Options that I was replaced with weren’t listed on my Gains and Losses. If I had just read the final number for my Taxes I would have lost a $6,000 Capital Loss that reduced my tax bill considerably. Here is the post where I hunt down the omission OptionsHouse Schedule D Error
What the heck was that all about? A Reverse Stock Split impacting my Capital Loss Reporting?
I know I can get a bit geeky on the technical side of things when it comes to Finances, and the above might not have made the most sense to some readers. The point of the matter though is when you trust the click of a button and the answer you get then you don’t know if an error has happened, and you aren’t in the position to plan ahead. Being able to work out your finances on paper (with a calculator) is one of the most powerful skills you can have. Furthermore I am happy with using Spreadsheets that I create too, but if they are prebuilt then I need to check the formulas and code to make sure they are adding up correctly. Even robust software like Microsoft Excel gets buggy, especially on complex forms. So the ‘cooler’ the solution appears to you, the more chance of it messing up and you not knowing.
Conclusion
Lets get back to basics and do some of the more manual labor when it comes to taking control of our finances, doing so takes more time and more effort, but comes with the benefit of more understanding and more control. I guarantee that if you know the numbers inside out you will make better decisions. Once you have the foundation in place, then is the time to start outsourcing the heavy lifting to online tools, because you will have gained an eye that helps show you where the errors can happen.
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