The new year is an excellent time to take stock of your goals and priorities. When it comes to resolutions, you may first think of commitments you’d like to make around your physical well-being—drinking more water, hitting the gym, giving up smoking—but your financial well-being is just as important. Why not make this the year you create a house budget, clear your credit card debt and resolve your IRS tax debt?
We’re here to help you start the year on the right financial foot. If you’re not sure where to begin with resolutions related to your finances, we’ve got a list to get you started.
Embrace the Big Picture
It’s tempting to turn a blind eye to your finances, especially with inflation eating into your take-home pay and interest rates on the rise. Even at the best of times, organizing your income and expenses can feel tedious, but if you owe money, the process can be overwhelming.
As much as you may want to avoid a reality check on your personal balance sheet, it is important to periodically check in for an honest look at the state of your financial well-being. Only by knowing how much you are taking in, how much you owe and where your money is going, will you know where you have risk and where you should direct your attention.
Often, when faced with debt—whether credit card debt, IRS tax debt or another source—the fear of not knowing how bad it might be is worse than reality. Once you know the total amount, where it is owed and what interest rates are being charged, you can prioritize your debt and move forward with a plan.
Start with a budget, to help you see the big picture. Make one column for your income, then another for expenses, including the payments you make for your bills and debts. This cash flow exercise will help you see where your money is flowing each month and where you have room to increase spending or saving.
Tackle the Highest Rates First
Once you’ve had a look at your cash flow, it’s important to step back and have a look at the nature of any debt you owe. Make sure you include all forms of debt as you make an inventory. Do you have a car loan? Are you paying down credit card debt? Do you have outstanding IRS tax debt? Remember that your mortgage or any business loans should be included.
On a spreadsheet dedicated to debt, create one column for the title or debt description, another for the total amount owing and a third with the interest rate charged. While this final column may require some research, it is important to understand the cost of borrowing, especially in a time of rising interest rates. This information will help you make an informed decision about how to prioritize your debt.
Generally, it’s a good idea to pay off your debts with the highest interest rates first. For most Americans, this will mean paying off credit card debt first, which can easily charge 19.00% or more, monthly. While you make minimum payments on other forms of debt, you should pay down as much as possible on your credit cards or other high-interest debt.
Once you’ve cleared your debt with the highest interest, you can move on to the next one. This method is the quickest way to clear your debt.
Clear IRS Tax Debt
One exception to this debt strategy is the approach you may want to take with IRS tax debt. While most other forms of debt are black and white—you can see the charges made on your credit card, you know you used a loan to purchase your car, etc.—money owed to the IRS can be less tangible.
Perhaps you’ve had IRS notices regarding unpaid back taxes or outstanding balances. Maybe the IRS has even threatened to seize your property or assets. In either case, it’s important to recognize that IRS tax debt is in its own category, one that needs to be settled quickly, but fairly. Just because the IRS claims that you owe a certain amount of money, doesn’t mean you do.
Unlike other debt, where you can see the total amount owing and track your progress against it, the IRS has its own set of rules for payback. Rather than ignore IRS notices or attempt to negotiate your own installment agreement, it’s important to work with an experienced tax professional—a firm that can not only protect you from enforced collection actions such as tax liens and levies but can also run interference, manage IRS calls and notices, and potentially, help you lower your overall tax debt.
Examine Your Savings
An important financial resolution is to fine-tune your savings. Once you’ve examined your current financial picture, prioritized high-interest debt and sought help for IRS tax debt, it’s a good idea to take a closer look at your savings.
Do you have money sitting in a low-interest account that could be earning more money? Consider transferring this money to either a high-interest savings account or a certificate of deposit, both of which are likely to offer higher rates.
Of course, another way to add to your savings is to increase your income. The start of the year is a good time to brainstorm ways that you can do this. Perhaps you can apply for a new job, pick up a side hustle or ask your current employer for a raise.
To help take the legwork out of saving money, work to automate it wherever you can. Whether you are saving for a vacation, for holiday gifts next year or for retirement, automatic withdrawals can help you plan and simplify the savings process.
Reduce Your Expenses
Another way to increase your savings is to reduce your expenses. Once you’ve identified how you might handle personal debt and/or IRS tax debt, you can look at other places to fine-tune your spending.
The start of the year is a great time to renegotiate contracts with your existing providers. Over time, your phone, cable or internet bills, for example, may have regularly increased, to the point that you are paying far more for your services than new customers. Speak to your service providers to make sure you are getting the best possible deal.
With inflation on the rise, it can be hard to cut down on expenses such as groceries, gas and other necessities. Where you can, get creative about nice-to-have expenses, such as travel and entertainment.
Identify Your Tax Team
One of the best ways to set yourself up for financial success in the new year is to have both a plan and financial experts on your side. While you might turn to financial planners to help you set a budget or invest your savings, it is critical to have the right tax team on your side, as well.
Resolving your IRS tax debt or other tax problems can not only provide peace of mind, but it can also relieve some of your overall debt burdens. Make sure you have an experienced tax team in your corner as you begin the new year.
At Franskoviak Tax Solutions, we have helped thousands of clients manage their IRS tax problems for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about a free consultation to handle: personal and business taxes, threatening IRS tax notices, IRS tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes and more.
Start with a free consultation—we’re here to help you minimize your overall tax burden, negotiate on your behalf and reduce the amount of IRS tax debt you may owe.