UPDATE: There have been some excellent comments in this post and I’ve updated some incorrect information in the charts. I’ve summarized some of the main points in comments #24 below.

I have such a headache. I thought I would post a little summary comparison of the major (and a few minor) tax preparation programs both software and online. I figured I would end up comparing them anyway for my own personal use, so why not let others benefit. What I didn’t realize was that all the companies I reviewed, including the big ones (TurboTax and TaxCut) would have some strange incompetency to communicate features and benefits in a clear, concise manner. I spent hours trolling and searching deep through these sites looking for clarification on such basic things as pricing and major benefits. Even information such as which products include state tax preparation in addition to federal was hard to find. Well, I’m happy to say I’m done with my research and can now share the fruits.

“Out-the-door” pricing defined

In order to make an apples to apples comparison between offerings I used “out-the-door” (OTD) pricing. I define OTD pricing as the total price of an offering including both the costs of federal and state tax preparation as well as federal and state tax e-filing. It was surprisingly difficult to mine this data and almost seemed to be purposefully ambiguous on the provider websites. In most cases, the OTD price wasn’t listed by the provider so I had to manually add together the various costs scattered across the websites to sum up the OTD prices. See the charts below for more details.

I did not review the quality of the software. Not only would such a comparison be a monumental effort, but tax situations vary so much from person to person that my experience alone would not necessarily be an accurate representation. At least you can get the low-down on price and then choose the feature set that’s right for you from the lowest cost offerings.

Providers Reviewed

I was amazed at how many tax preparation providers there are. I chose to review the most prominent providers, TurboTax from Intuit and TaxCut from H&R Block, in addition to a smattering of smaller offerings. Here is the complete list:

• TurboTax (Intuit)
• TaxCut (H&R Block)
• TaxBrain.com
• CompleteTax
• EZTaxRefunds.com
• TaxActOnline.com

The bottom line

If your Adjusted Gross Income (AGI) is under $50,000 you can prepare and file federal taxes for free

Let me get to the point for those who don’t have the patience to wade through the details. If your AGI is under $50,000, you can prepare and e-file federal taxes for free through the IRS “free file” program. In fact there’s a whole list of tax preparation providers that will provide this free service.

View a complete list of free tax preparation providers here.

If you qualify for free federal tax services, you’ll still need to pay to prepare and e-file state taxes. The best price for online state tax preparation and e-filing I came across was CompleteTax who offers this service for $12.95.

If your AGI is above $50,000

February was crazy. It started with my whole family getting the flu. I was out of work for a full week. I usually only miss 2 days maximum for a typical cold. Next, we went to Disney World for a week on vacation. A few days after that, my wife was scheduled for an outpatient surgery and her recovery has been more difficult than we thought. It’s not surprising that I haven’t been able to post for a while.

Having my wife go through surgery again actually takes my thoughts back to when she had surgery two years ago. That unexpected event is what compelled us to take control of our finances. It was either that or we would be forced to move. What a contrast between then and now. Back then we really had no grip on our spending. We knew how much we were spending overall but had no mechanism in place for controlling the money before it left. We didn’t know how we were going to pay for the surgery and had no emergency fund in place. We were living within our means but didn’t have a budget in place.

Two years later we were easily able to budget in enough money to pay for her surgery and a week-long vacation (including airfare) without undue stress. And that’s without any significant changes in income. It truly amazes me how much money we were wasting before because we didn’t have a system in place to direct our spending. I don’t even notice a difference in lifestyle even though we spend less. In fact, there are ways our lifestyle has improved. Now, rather than having a constant gnawing feeling that I might be overspending, I feel liberated knowing exactly how much I have left to spend. We can direct our spending to the things we really want rather than impulse purchases that we won’t value much. It really feels like a before and after makeover. It’s a night and day difference.

It can take a lot of up-front work to establish a working budget. The good news is, once your budget is established it really doesn’t take a ton of work to maintain. You can make budgeting even easier by organizing it the right way. This article will review a few different ways to organize your budget. Then I will explain the easiest way I’ve found to organize our budget.

Fixed/Variable Model

In my post about how to create a personal budget I addressed how to create your first budget. In that article I advocated using the fixed/variable model; first allocate your fixed and semi-fixed expenses, and next allocate your variable expenses. For first-time budgeters, this makes a lot of sense and helps you first determine your hard landscape (fixed expenses) before you fill in the rest (variable expenses). This is still one of the best ways to create your first few budgets, but isn’t the most efficient way to group categories once your budget is established.

Necessity Model

The next model is the necessity model. Using this model you budget your necessities first (food, housing, clothing) and proceed from most essential to least essential. This ensures you can pay for shelter, food and clothing before you pay for your new HDTV. This can also be a useful model for novice budgeters. But it is particularly relevant if you’re in an emergency financial situation or if you’re facing bankruptcy. Give priority to the necessities and let the other expenses take a back seat. However, this model is not very useful for normal month-to-month budgeting.

Usage Situation Model

There are really only a few ways to “use” or manage money. By grouping budget categories by how the money is used you can accelerate the budgeting process.

I’ve found it most helpful to group the categories as follows:

• Automated categories – Expenses paid automatically (electronically)
• Cash (Debit) categories – Expenses that will be paid for in cash or with a debit card
• Accumulated categories – Periodic or irregular expenses that need to be saved for (these may be automated or paid for using cash or a debit card)

Grouping categories by usage situation also makes it easier to manage and keep track of your money. For example, by grouping automated categories, it’s easier to identify how much money you need in your bank account to cover those expenses and the timing of those withdraws. If you want to review your automated expenses to ensure they’re behaving as expected, you have them all at your fingertips. By grouping cash categories you can quickly calculate how much money to withdraw every month for cash expenses. By grouping accumulated categories, it’s easier to track and manage the balance of each category and where those funds reside.

Let’s look at each group individually and how to address them in your budget.

Automated Categories

When reviewing your budget, first address the automated categories. This group is pretty self-explanatory. These are all the categories that are paid automatically on a monthly basis. They are typically fixed (with a few exceptions) and the amount rarely changes. The great news is, this is the category that should take almost no time to address. You just copy the amounts from one month to the next and you’re done. You typically won’t need to have big discussions with your spouse about these categories unless the rest of your budget is very tight.

Here are some examples of Automated categories:

• Utilities
• Mortgage
• Some charitable donations
• Retirement or other long-term savings
• Subscription Services (satellite)
• Some insurance expenses
• Some medical expenses

Automated categories tend to be difficult to change without a lot of effort. For example, your mortgage payment cannot be easily or quickly changed. If you decide to switch satellite or cable providers, it’s typically a multi-week process. That’s not to say these expenses can’t change, but often it takes more time and effort to do so than other expenses.

Dealing with variable automated expenses

Some automatic expenses are variable such as utilities (gas, electric). In these cases, find out if there’s a fixed payment option. Many utility companies offer a fixed payment option that calculates a fixed average payment for 6 months or a year. If you end up paying too much, the fixed payment is adjusted down at the end of the period. Pay to little and it’s adjusted up. These programs can provide a lot of stability and predictability to a budget and should be used if possible.

If a fixed payment program is not available, you’re still ok. Simply look at how much you pay on average for that expense and budget a high average for that category. For example, our telephone provider doesn’t provide a fixed payment program so we looked at our bills and found that, on average, the bill is $80 (including internet service). It tends to regularly fluctuate up to $85 and down to $75, and very rarely goes up above $90 (my wife didn’t realize calling Canada was so expensive). We decided to budget on the high end of the typical range at $85.

By budgeting on the high side, you give your budget more stability and provide a little cushion. If we go over $80 a little, we’re covered. If we go under, we let the extra funds accumulate to cover months that go over. Don’t worry too much about the exact budget amount. Over time, it will become apparent if you’re budgeting too much or too little. If you budget too much, feel free to re-all ocate the overage and treat yourself to dinner. That will act as a cue that you can reduce the monthly allocation. On the other hand, if you find you’re always short on that category, that’s a cue to increase the allocation. I should also mention that I’m assuming you already have an emergency fund establish so that if you happen to unexpectedly go over a large amount, you’ll have the money to cover it. You can check out my article about ways to save a little cash for an emergency.

Cash (Debit) Categories

Next, address your cash (or debit) categories. These expenses are usually depleted every month; you budget $100, you spend $100. Uncontrolled, cash categories tend to be highly volatile. This is where much of your overspending can occur which is why it’s good to use cash. Fortunately, as your budget matures this group is fairly easy to address because your needs won’t change much from month to month. When you first start budgeting as a couple, there is typically a lot of discussion about how much to allocate to categories like “grocery,” but over a few months, you should settle into a sweet spot. After that, you typically won’t make major adjustments unless there’s a significant change in your financial situation.

Example cash (debit) categories are:

• Grocery (food or non-food)
• Eating out
• Clothing
• Some Medical
• Prescriptions
• Over-the-counter medications
• Babysitting
• Personal Money
• Entertainment

A good rule to follow is that any category where you tend to overspend should be cash. One benefit of grouping your cash categories is that it’s easier to calculate how much cash you need to withdraw every month because they’re all in the same place.

Accumulated Categories

Finally, look at your “accumulated” categories. “Accumulated” budget categories are expenses that may occur less frequently than monthly or that may be unpredictable. In other words, these are categories where you “accumulate” funds over time until they are needed. Accumulated categories are the least homogeneous of the three groups. Some are semi-fixed like Insurance and car registration payments. Others can be wildly variable like vacations and gifts. Some accumulated categories are easy to change while others may be difficult. For example, changing your clothing budget is not difficult to do (even though your wife might have issues with it). On the other hand, quarterly or yearly life insurance payments may take considerable effort to change, particularly if you need to research insurance companies, get a new quote, get a blood test, etc.

Unfortunately this is where a lot of the arguing, negotiating, compromising, and pleading takes place. In a more established, mature budget, this group won’t take long. But if your just starting out, or if you’ve had some changes in your financial situation, expected or unexpected, you’ll want to plan on spending some time here.

Here are some examples of Accumulated categories:

• Insurance
• Car maintenance/registration
• Savings for large purchases
• Household maintenance
• Medical
• Gifts
• Travel
• Subscriptions
• Memberships
• Car replacement (we still aren’t funding this one)
• Clothing (if not taken out in cash)

There are 2 ways to deal with accumulated expenses

1. Make equal payments

If your $100 car registration is due in 6 months, allocate $17 a month to this category (100 divided by 6). By the time the registration is due, you’ll have the money. If you use this method, be careful not to simply divide all yearly expenses by 12 months unless you really have 12 months before the payment is due. When we first started budgeting, our next life insurance payment was only 4 months away so we had to allocate more money up front so we’d have enough. Once we made the payment, however, we then had 12 full months until the next payment and reduced the monthly allocation accordingly.

You can track how much money has accumulated in a number of ways ranging from a sheet of paper to a spreadsheet to financial management software. In future posts I will address different ways of tracking these categories. In the mean time I would recommend either a basic sheet of paper, or keep track of the accumulated amount right in your budget spreadsheet next to the category name. If funds from different categories reside in more than one bank account, also note next to the category name what bank account the funds reside in.

2. Use windfall money to fill in the gaps

Most people don’t have enough money to fund all their accumulated categories in full every month because this is where many of the “wish list” categories reside. If you can’t fund every category you can rely on (or hope for) financial windfalls to fill in the gaps. When we first started budgeting, we were so tight that we simply didn’t have enough to allocate every month for gifts and vacations. But because the rest of our budget was under control, when we received a bonus or financial gift we could allocate it to these categories accordingly. As we’ve refined our budget and as our income has increased, we’ve been able to fully fund many of these categories on a monthly basis.

Speeding up the budgeting process — An example

Using these groups, here’s how our budgeting meeting usually goes.

1. We look at automated categories. No surprises there. All the expenses are the same as always. Gas and electric are on an equal-payment system. The phone bill is $5 more than usual but we’ve been under a few months and have a little extra allocated to cover it. Time spent – 1 minute.
2. We look at cash categories. Over time we’ve settled into a comfortable amount for each of these. For categories like “personal money” we’ve had many heated discussions in the past about how much should be allocated, but now that we’ve reached an agreement that we both feel comfortable with it doesn’t change from month to month. Emily calculates how much total cash she needs to withdraw this month. Time spent – 3 minutes.
3. We look at accumulated categories. We’re on track to have our next life insurance and car registration payments saved by the time they’re due. We haven’t had any major medical expenses so we’ve built up a nice little balance in that category. We discuss if we need to reduce the amount we’re allocating every month to medical but decide that we’d rather have the funds ready just in case of a medical emergency. Time spent – 5 minutes.
4. If there is any money not yet allocated, we first look to see if there are any known expenses coming up that aren’t on track to be fully funded. Typically this ends up being “gifts,” “vacation,” or a similar category. We determine which category to fund.

   If we allocated more than we have in income, we discuss which categories to take money out of. Time spent – 10 to 30 minutes

   This last step is where the bulk of our conversation takes place. By grouping the categories, we were able to get through the bulk of the budget in a matter of minutes. Sometimes you can’t avoid lengthy budget conversations when you have an unusual month or your financial situation changes. But on an average month we can literally get through our budget as a couple in 15 minutes.

Note: the times indicated don’t include the time spent to reconcile last month’s budget.

Little distinctions like this can really streamline the budgeting process over time. What tricks do you have for streamlining your budget?