More Practical Finance: Incorporating Economic, Tax, and Legal Issues
In part 1 of this discussion (Read here: Here’s Your Key to Practical Personal Finance), I addressed some common practical financial and accounting issues that many individuals, not just those in the financial and accounting professions, might want to consider. For instance, I discussed the process that most folks encounter, in which they need to decide what to do with extra income which they do not consume immediately on necessities (e.g. food). Moreover, I addressed the issue of what considerations people may want to ponder if they have both excess cash from their paycheck, as well as also having debts. In particular, I mentioned that assessing which type of debt they have is often a crucial one, since the interest rates on different types of debt (e.g. mortgage vs. credit card) can differ greatly.
In this part, I’d like to also include some practical economic, tax, and legal issues to consider in hopes of showing that, for better or worse, everyday decisions can be intricate, but not impossible, to assess more comprehensively.
From an economic standpoint, when considering whether to pay down debts at quicker than the minimum required rate as determined by the lender, it often requires the borrower to consider the basic practical economic issue which should underlie all decisions: costs versus benefits (“cost-benefit analysis” in economic jargon). However, it can be quite challenging to fully account for all of the costs and benefits involved with different types of choices folks might have at their disposal (hence the importance of accounting!).
Therefore, in addition to assessing practical finance and accounting issues such as whether people can earn more on their investments than the interest cost of maintaining current levels of debt, they may also want to consider related tax and legal issues. Regarding practical tax issues, many folks who have mortgage debt take a tax deduction because the interest cost on their mortgage leads them to itemize their deductions on their tax return rather than taking the standard deduction.
In doing so, the net interest cost of the mortgage debt might prove to be lower than the stated interest rate because of this tax benefit. As for practical legal issues to consider, different types of debt have different legal repercussions to the borrower when not paid. For example, if inability to pay back debts ends in declaring bankruptcy, that result hurts folks’ credit scores.
These scores are a vital issue because they are utilized by potential lenders when considering a potential borrower for a loan and, if so, at what rate.
Moreover, one (more-and-more common) type of debt may not be dis-chargeable in bankruptcy. Although there are some exceptions, student loans are often not able to be eliminated by going through the bankruptcy process (although this important issue is currently being discussed in the Congress as succinctly articulated upon here).
It is bad enough to go through bankruptcy and have one’s credit score negatively affected. But that issue is problematically compounded if one takes the hit on the credit score and still owes the debt.
In conclusion, there are countless issues regarding the five pillars of professional services (finance, financial accounting, economics, taxation, and the law) when making many every day practical decisions. In order to make the optimal economic decision of maximizing the benefit while minimizing the cost, it is helpful to be familiar with as many related issues as possible.
Jonathan Prober has specialized his academic and practical endeavors on the five pillars of professional services: finance, economics, financial accounting, taxation, and the law. His professional experience includes dealing with business and legal issues, including wealth management, financial valuation, and corporate strategy. For more, visit Prober’s Playbook or follow Jonathan on Twitter at @jonathanprober.
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