It was March of 1976 – my third year of earning a living – when I discovered how little I knew about my own finances.
The year before had gone better than I’d expected. In addition to my full-time job as an engineer, I’d been working part-time for the New York Islanders hockey team. That second salary was almost all bankable, or so I thought until I calculated what I owed the government. That’s when I realized the taxes that should have been withheld from my handwritten Islanders paychecks were not mine to keep. It seemed terribly unfair to give the IRS more than they’d already siphoned from my full-time earnings, but I got no sympathy from Uncle Sam. Hello tax bill, goodbye savings.
That was decades before I started in EMS, yet I already had something in common with many paramedics and EMTs: I didn’t know enough about managing money.
Now, after 45 years as an employee, small-business owner and private investor, I’m comfortable enough with personal finance to write about that subject for EMS providers with modest income and assets. If you’re looking for broader or more detailed advice, I suggest you seek professional financial guidance. I’ll even tell you where to find that as I offer my own take on taxes, budgeting, investing, and self-employment in this three-part series.
Tax preparation tips
I can understand why lots of people don’t do their own taxes. Some of the rules seem as complex as cardiology. I’m not suggesting you become an accountant; just know that hiring a tax preparer doesn’t relieve you of responsibility for errors. You could get hit with interest and penalties for underpayment if your local tax guy or gal doesn’t know enough about your prior-year finances, or turns out to be no more of an expert than my Aunt Clara.
Fortunately, there’s a middle ground that allows you to gain familiarity with taxes while your favorite number cruncher does most of the work. It’s called oversight.
A few years ago, my wife and I hired a carpenter to rebuild a rotting door frame. Until then, everything I’d learned about carpentry was from Mr. Chiasson’s seventh-grade woodworking class. I wasn’t ever going to be a craftsman, but I kept an eye on our handyman’s handywork just to see what I could learn. Who knows, maybe next time I’d know enough to build something more useful than a stepstool (my junior-high masterpiece).
There’s nothing preventing you from applying as much oversight to your tax returns. Instead of merely delivering year-end paperwork to your tax preparer, become familiar enough with those forms to check the accuracy of income and deductions. For example, does your W-2 match your year-end pay stub? Are interest, dividends and other earnings stated accurately on your 1099s? What does each dollar amount mean?
A good, one-size-fits-all reference for that kind of information is J.K. Lasser’s “Your Income Tax.” It has a comprehensive index for looking stuff up and you don’t have to be a CPA to understand what you’re reading.
If you’d like to save even more money and amaze your friends, try doing your own taxes with free software offered through the IRS or consider inexpensive commercial apps. Completing a simple return isn’t much harder than documenting a cardiac arrest on an ePCR.
Even better, avoid costly surprises and take control of your finances by making tax planning a year-round activity. It’s not easy, but it’s less of a hassle than biannual refreshers. You could try a low-tech but puzzling tool the IRS has been offering since World War II: Form W-4. It’ll help you calculate how much money should be withheld from your paychecks for federal income taxes. You’re supposed to submit one whenever you start a new job, but it can also be used to re-estimate your tax liability whenever there are changes to your non-wage earnings or deductible expenses.
I just filled out a sample W-4. The experience made me glad I don’t work for anyone anymore. You’ll need as much tenacity as you would treating refractory vfib ... on an iceberg.
Another approach would be to use commercial software or a homegrown spreadsheet to monitor your finances quarterly. That’s the way to go if you’re computer-savvy, or if government paperwork provokes a fight-or-flight response in your household.
Speaking of withholding, I know plenty of people who intentionally have more money deducted from their wages than they have to, just to get bigger refunds the following spring. That’s like overpaying a credit-card balance to help finance future purchases.
The IRS isn’t a bank. You won’t earn interest on your “deposit.”
When to take Social Security
There are two main issues these days with Social Security: when to take it, and how much of it will be there for you when you do. You have no control over the latter, but let’s assume a gallant bipartisan effort allows your generation to retire sometime before age 70 with current benefits and not much more of a tax burden than you have now (6.2% of your wages). Here’s what would be most important to know.
You could start taking Social Security as early as 62, according to 2019 rules, but your monthly checks would be 25% lower than if you’d waited until “full-retirement age” (67 if you were born after 1959, 66 for most of you born earlier). Those payments increase another 8% each year you postpone retirement, from FRA to age 70. That means the difference between Social Security benefits at 62 versus 70, with compounding, is a whopping 76%! If you have another guaranteed way to earn that much on your money over eight years, you should open an office with a view and stop working 24-hour shifts.
I know what some of you are thinking; “But Mike, if I don’t start taking those benefits as soon as possible, I might not live long enough to make up for all those missed years.” True, but consider the reverse: What if you live into your 90s, or even past 100? Wouldn’t it be important to have an “insurance policy” that pays you 76% extra for life? That could be the difference between an apartment and some sleezy nursing home. Social Security as old-age insurance is the most important concept I hope you take away from this article.
There’s so much more to know about Social Security, but no room left to write about it. Two really good resources are the government’s own website and “Get What’s Yours by Kotlikoff, Moeller, and Solman.” The latter uses real-world examples and even humor to simplify Social Security. I found it so helpful, I’m thinking of naming my next three children Kotlikoff, Moeller and Solman.
Next time I’ll cover budgeting.
