Redirect Energy Spent on Taxes Toward Long-Term Financial Goals


One of the challenges of managing any enterprise, including your financial future, is taking care of day-to-day tactical details while also managing future-oriented strategic issues and opportunities.

web-axstj-taximg_8062-1013-6302.jpgMost successful people in business do both very well. They manage to get the job done today while also carefully managing the longer-term drift of their career, their business, and the marketplace around them.

Unfortunately, research has shown that when it comes to managing our own financial situations, business people tend to focus mostly on the tactical “here and now”.   Gripped in detail, we often fail to design a rigorous strategy about where we are going in our financial lives and how we are going to get there.

I am especially reminded of this tendency around tax time.  Each year, I am struck by how much time and energy people spend working on their taxes, especially when compared to how little time and energy they invest in addressing the larger strategic financial concerns that will ultimately have a much bigger impact on their financial future.

As with most tactical matters, we cannot ignore the need to prepare our tax returns.  Most important, the law requires it.   Also, our communities depend on tax revenues to provide much of what we consider to be essential to living a good life.  Nonetheless, nobody wants to pay any more taxes than required.

As a result, many people spend more time preparing their tax returns than acting on any other financial aspect of their lives except for their jobs.   I sometimes wonder if one of the reasons that people do not take better care of their financial lives is that tax season leaves them so weary and annoyed that they have limited energy to act on any other financial concerns until the next tax season rolls around.

The challenge, I think, is to re-direct some of the energy we spend on preparing our taxes. I speculate that if people dedicated just a portion of that energy to thinking and acting on their longer-term financial situation, they would take better care of their financial future.

Here is a four-step process that I use to integrate strategic, long-term thinking into the irksome tactical challenges of preparing my tax return each year.

1. Pay for good help:  If you find yourself spending more than 15  minutes puzzling over some arcane IRS rule or how to categorize this expense or that source of income, you may not be making as good use of your time as you could be.  A competent CPA can probably answer that question very quickly for nominal cost to you. So, rather than suffer over puzzling tax questions, just list those issues on a page and let your CPA handle them for you.  Every year my accountant gets a cover letter from me with a half dozen “heck if I know where this is supposed to go” items listed, and the money I pay him to answer those questions is a fraction of the value of the time it would take me to figure out those answers on my own.

2. Understand where the money went:  With the time freed up by paying for good help, I analyze approximately how I spent the money I earned the previous year.  I do not strive for precision – I just estimate how much I spent in different major expense categories such as taxes, retirement savings, mortgage, household, kids, vacation, home improvements, etc.. If expenses exceed take home pay, I identify where the other funds came from (e.g., loans, savings).

3. Compare to previous years:  Each year, I record in a simple five-column table the approximate value of each of the following categories: earned income, living expenses, amounts added by me to long-term savings/investments, and the total value of assets I plan to rely on during retirement.  This lets me see how my financial situation is changing over time.  I used to hand write this information on the inside cover of the file I use to collect tax documents; now I use a simple Excel spreadsheet.

4. Design a pragmatic story about the future:  Given the facts and figures gleaned from my year-to-year comparison, I tell myself a story, well grounded in what has actually happened and what is reasonable to anticipate in the future, about how my financial situation should evolve up until retirement and thereafter.

This last step is the most important step of all, because it provides a framework for thinking about many other financial concerns.  I will have more to say about this practice in a future “Taking Care” column.

For now though, just consider the value of reserving some of the energy spent in preparing your taxes, and reinvesting that energy in addressing longer-term financial issues and opportunities before you.  Unlike your tax return, you cannot “outsource” the process of designing a sound financial future for you and your family.