Eric Allen

Expert Insights on Budgeting

cfabi002 — Fri, 23 May 2025 17:40:32 +0000

Expert Insights on Budgeting cfabi002 Fri, 05/23/2025 - 10:40 More Blog Posts Adam McCann | WalletHub May 23, 2025

Assistant Professor of Accounting Eric Allen

UCR School of Business Assistant Professor of Accounting Eric Allen was asked to provide expert insights on Budgeting for an article recently published on WalletHub.

What are some benefits to having a budget?

The best way to think about a budget is that it's a plan. Like all good plans, making one forces you to get intentional and really think about what resources you have and how to use them. A budget also gives you a framework to evaluate future decisions, so you're not just making financial choices in the heat of them moment without consideration of your overarching goals. And even if you don’t follow it perfectly, it still gives you a clear picture of what you thought would happen versus what actually happened — and that comparison can be really eye-opening and helpful.

Are there any downsides to budgeting?

Budgeting can be time-consuming, and if you don't put enough time into it, you'll have one that doesn't match your actual situation. Also, remember it is just a plan, and life can be unpredictable. If you're too rigid about sticking to the original budget instead of adjusting with changing circumstances, it can feel stressful and discouraging. A budget should be a guide not a trap.

Do you have any tips to help people create and stick to a budget?

Like any habit, it's good to 'ritualize' the process. Set aside time each week, to check in on the budget and make any updates. The more you make the budget part of your regular routine, the more likely you'll use it, and the habit will stick. Also, if you typically hate anything related to dealing with financials, look at it as another way to learn - in this case, about yourself. What you value, how you spend, and what makes you feel secure. If you approach it that way, and allow yourself to be flexible as things change, you'll be surprised how much you can learn from the process.

A budget is a plan that outlines how much of your income should go to different parts of your finances, from monthly bills and day-to-day purchases to savings, charitable donations and investments. Having a budget helps you stay organized while moving toward your financial goals and holding yourself accountable.

Unfortunately, budgeting isn’t something that’s often taught in schools, despite 94% of the country thinking it should be, according to a WalletHub survey. The good news is that it’s a skill that’s never too late to learn, and it’s actually a lot easier than it seems.

Below you can learn even more about budgeting, from why it’s important to how to actually go about doing it.

Key Things to Know About Budgets

Importance of Budgeting: Having a budget is important because it keeps you organized and can improve your financial status. Other benefits include building discipline and feeling like you’ve accomplished something.
Creating a Budget: To build your budget, first gather information on your income and expenses. Then, set goals, choose budgeting tools, prioritize your expenses, and allocate money based on your priorities.
Tracking Your Budget: You’ll need to track your budget progress each month and reassess from time to time, to make sure you’re on the best financial path possible. It’s also important to be honest about your spending and whether you meet your goals. Nearly 1 in 5 Americans aren’t honest with themselves while budgeting.
General Budgeting Guidelines: Many people recommend setting aside 50% of your income for necessities, 30% for “wants,” and 20% for other things like building your savings or paying down debt. This is called a 50/30/20 budget.
Different Budgeting Strategies: With a “zero-based budget,” you focus on making your income minus your expenses equal $0, regardless of specific percentages. An “envelope budget” can help you tangibly lay out cash for each spending category. And a “pay yourself first” budget prioritizes saving and investing.

Why Is Budgeting Important?

There are many reasons why having a budget is worthwhile – and even essential – for everyone. They include:

It improves your financial situation. Budgeting helps you avoid overspending, and it helps you work toward goals like building an emergency fund, paying down debt, growing your investments, or saving for a big purchase. Sticking to a budget can also help improve your credit score.
It helps you stay organized. Knowing exactly how much you plan to spend on each item in your budget makes it easier to set money aside and track your progress each month. People who have a budget feel significantly more secure, confident and in control of their lives, according to a survey by the Certified Financial Planner Board of Standards.
It expands your knowledge. Budgeting gives you a better idea of how much you’re spending relative to how much you earn, as well as what you’re spending your money on.
It builds discipline. Sticking to your budget may involve passing up on things that you want, which can build self-control and other good habits. Only 1 in 5 Americans with a budget say they exceed it, according to a recent WalletHub study.
It gives you a sense of accomplishment. Budgeting may not be fun, with 27% of Americans saying they’d rather do laundry and 20% saying they’d rather do their taxes. But once you have a budget, you’ll find that setting goals and achieving them feels good, especially when it also leads to growing your net worth or reducing your debt.

How to Make a Budget

Making a budget might seem daunting at first, but it’s actually pretty simple once you break it down into the proper steps. Plus, once you make a budget for the first time, you’ll have the skills you need to update it as your financial needs change.

Gather information: Figure out how much money you take home each month, and then come up with a list of your monthly expenses and how much they typically cost.
Set goals: Decide what you want your budget to accomplish, such as getting debt-free in a certain time period, growing your emergency fund to a certain amount, saving up for a big trip or investing a certain amount every month. Your goal can even be as simple as staying organized and spending less than you make.
Use tools: There are a number of free and paid budgeting tools available that can simplify the process.
Prioritize: Divide your expenses into categories of high, medium and low priority. High priority means you must put money toward them. Medium priority means you should allocate them some funds, but they’re not the most important. Low priority means you can do without them.
Plan: Decide how much money to give to each item on your budget. You can start by setting aside money for all your mandatory bills, and then divide the remaining money between your personal “wants” and more important things like paying down debt, saving, and investing.
Track your progress: Use your budgeting tools to automatically or manually track your spending each month. See whether you are able to stick to your budget or you frequently exceed it.
Reassess: The budget you make now won’t necessarily be the right budget forever. If you meet one of your goals, you can set a new one and adjust accordingly. In addition, if you’re having trouble with your current budget, you may need to go back to the drawing board.

Budget Example

Below is an example budget for a typical American household, broken down into some common expense categories the household might have. This example is based on the real median household income, which is around $64,200 per year or $5,350 per month, after taxes. Keep in mind that actual incomes and expenses will differ widely by person and location.

In general, many sources say that you should follow a 50/30/20 structure with your budget, spending 50% on “needs,” 30% on “wants,” and 20% for savings and paying down debt. As you can see, though, it may be difficult to keep your “needs” to 50% of your budget during this inflationary period (the example budget above spends 62% on “needs”). In addition, it may be wiser to spend a higher portion of your budget on things that will help you financially, like paying off debt and building your savings, rather than things you simply want to have but don’t really need.

You can learn more about budgeting with WalletHub’s helpful budgeting tips guide. You can also join WalletHub for free to gain instant access to our budgeting tools.

Types of Budgets

There are several different types of budgeting strategies you can use, and you may want to try out various ones in order to see which works best for you.

50/30/20 Budget: You put 50% of your income toward your “needs,” 30% toward your “wants,” and 20% toward debt payoff, savings, and investments. This budget allocation is a good general rule of thumb, but you don’t need to strictly follow the recommended percentages, especially if your “needs,” or essential expenses, take up more than 50% of your income.

Zero-Based Budget: Zero-based budgeting focuses on ensuring that you don’t spend more than you make, requiring you to assign every dollar you make to a specific expense. Its concept is simple – your income minus your expenses should equal $0, regardless of how you distribute the money.

Envelope Budget: This is a budgeting style for people who want to make sure they don’t spend too much in one specific category. Essentially, you put a certain amount of money into “envelopes” each month for each spending category. This can be actual physical envelopes with cash or just virtual envelopes on a spreadsheet. Each time you pay for an expense, you take money out of the envelope, and once it’s empty, you’re not allowed to spend any more in that category.

Pay-Yourself-First Budget: Unlike other types of budgets, this one focuses the most on your future. It stresses that the first thing you should do each month is set aside a certain amount of money for savings and investments. After you’ve done that, you can divide the rest of your budget between essential expenses and things you want. This type of budget is good for people who want to make sure they don’t treat saving and investing as an afterthought.

The No-Budget Budget: This is the loosest type of budget, and we don’t recommend it over other types. With this budgeting strategy, you just focus on the things you absolutely must pay for each month. As long as you track your spending and set aside the money you need for those essential expenses, you can spend the rest of your money on whatever you want, without a defined plan. Budgeting this way is better than nothing, but planning out all or most of your monthly expenses in detail is always better.

____________________________________
All images courtesy of Google Gemini AI

Tags

faculty

faculty spotlight

Eric Allen

Most Californians Get a Tax Deadline Extension

ilseu — Mon, 17 Apr 2023 15:30:20 +0000

Most Californians Get a Tax Deadline Extension ilseu Mon, 04/17/2023 - 08:30 More News David Danelski (david.danelski@ucr.edu | UCR News) April 14, 2023

For most Californians, this year’s tax season is a procrastinator’s dream come true.

While most of the nation toils to meet next week’s April 18 filing deadline, just about all income tax payers in California don’t have to file their federal or state tax returns until Oct. 16 – thanks to disaster declarations stemming from the recent heavy rains and flooding. Only those living in the sparsely populated Modoc, Shasta and Lassen counties in northeast corner of the state have to get their returns in the mail by next Tuesday.

Here’s some insights and advice from Eric Allen, an assistant professor of accounting at UC Riverside’s School of Business.

Eric Allen, assistant professor of accounting

Question: Millions of Californians who were not or only minimally affected by the rainstorms will still qualify for tax filing extensions. So, why would the Biden and Newsom administrations offer such broad extensions to most Californians?

Allen: I suspect that part of it is attributable to administrative convenience. It’s much easier, and less costly, to administer a program like this when you have essentially everyone automatically qualify, rather than have taxpayers individually apply and the tax agency verify that they qualify or suffered an economic loss. It also reduces the compliance costs for taxpayers since they only have to do minimal research to see if they qualify and don’t have to file anything with the tax authorities and wait for the approval.

For those facing significant tax payments, would be best to wait until the Oct. 16 deadline?

Allen: From a time-value of money perspective, it’s always better to pay later as you can use the funds to earn interest or some other return in the meantime. However, make sure to either set those funds aside now or have a specific plan as to how you will have them available in October. The worst-case scenario is not being able to pay with the actual return. So if you don’t think you’ll have to self-control to save for the next six months, I would file sooner rather than later.

Also, if you’re someone who will worry about the return until it’s filed, then I would recommend just getting it out of the way now and reducing that cognitive load.

Similarly, for those expecting a tax refund, would be it best to ignore the extension and file accurate returns as soon as you can?

Allen: Generally yes, but I would stress the word ‘accurate.’ Don’t rush the return just to get a refund. Taking a little extra time to make sure you’ve fully included all necessary information and can support all of your tax positions will save you a significant amount of time and hassle in the future.

Tags

UCR News

Eric Allen

Taxes

Elon Musk Can Save on Taxes by Giving Away Stock

ilseu — Mon, 03 Jan 2022 20:00:52 +0000

Elon Musk Can Save on Taxes by Giving Away Stock ilseu Mon, 01/03/2022 - 12:00 More News Eric Allen, UCR School of Business | For "The Conversation" December 15, 2021

Eric Allen assistant professor of accounting at the UCR School of Business

Tesla CEO Elon Musk is liquidating lots of Tesla shares. His transactions, which began in November 2021, could total US$20 billion or more. He has not said whether he plans to donate to charity the proceeds from selling those shares. But this move, which followed signs that the world’s richest person could be weighing whether to make a large gift to fight world hunger, has fueled speculation that he might.

As an accounting scholar, I’d be surprised if that is the direction he goes in with that money. It’s much more likely – from a tax perspective – that he would just donate stock directly to a cause he supports. That is simpler to do, compared with selling Tesla shares and then donating the proceeds. Donating stock would also more sharply reduce the taxes he owes.

The mechanics of the charitable deduction

Billionaire taxpayers are among the roughly 5%-10% of Americans who can significantly reduce their tax bills when they give money to charity. This is because they can deduct the value of their donations from their taxable income when they file their taxes – reducing what they owe Uncle Sam.

Before the tax reforms enacted during the Trump administration, a much bigger share of Americans could take advantage of this arrangement, known as the charitable deduction. But because of those tax changes, many of those people now take the standard deduction instead.

There are usually limits on how big the charitable deduction can be, however. Since 2018, the maximum amount of cash contributions that can be deducted has been 60% of total adjusted gross income. Often called AGI, this is all of the income someone generates minus specific adjustments allowed by the tax code.

The government suspended this restriction in 2020 and 2021 because of the COVID-19 pandemic to encourage support for charities.

Similarly, the government is letting all taxpayers who don’t itemize their returns to take a $300 charitable deduction, or $600 for couples who file jointly in 2021, as it did in 2020. However, both of these changes are currently scheduled to expire in 2022.

Cash, stock, art and real estate

Wealthy people usually donate cash, just like those of us who don’t have billions of dollars, or even millions, to spare.

But there are other ways affluent Americans can use their assets to support the causes of their choice. The law lets them donate any kind of property, as long as it’s with “disinterested generosity.” Generally speaking, this means that donors may not obtain any substantial benefits in return for their charitable gifts. Donations may go to nonprofits or, in some cases, domestic or global government agencies.

The most common way to donate without giving money is by giving away stocks and other securities that have appreciated – that is, grown in value. The benefit of giving away the stocks directly is that if they were to sell those appreciated investments instead, they would have to pay capital gains taxes on their profits before distributing any remaining cash to the charity.

The tax consequences depend on whether or not taxpayers have owned the stock for at least a year.

A hypothetical example

Consider the following example:

Imaginary taxpayer Johnny Dollar owns 10 shares of the hypothetical company Veridian Inc. that he purchased for $10,000. This stock’s current market value is $100,000 and he wants to use it to make a donation to his favorite charity.

If Johnny sold the stock he would be taxed on a $90,000 gain. Assuming that he would have to pay a 15% tax rate for the gain, he would owe $13,500 in capital gains tax, leaving only $86,500 left to give away.

If Johnny were to instead give that stock directly to the charity, he wouldn’t have to include any capital gain in his taxable income, and the charity would get a bigger boost. Plus, Johnny could deduct the $100,000 from his income at tax time.

This is how it would work if Johnny has owned the stock for longer than one year, which is what the government considers to be a long-term investment. However, the IRS limits deductions tied to donations of stock and other forms of property to 30% of AGI.

Things would work differently for Johnny if he were to give to charity assets he’s owned for less than a year. The authorities see the value of such property – which, if sold, would be subject to a higher tax rate – to be the asset’s purchase price. In this example, that would be $10,000 – even if the asset’s value has soared. The maximum deduction anyone can take for a gift of such assets is 50% of their adjusted gross income.

If instead the value of Johnny’s stock has declined, he would typically be better off if he were to sell first and donate the proceeds. That’s because he could deduct that loss against any other gains he might have from selling property, reducing his overall taxable income. He could then give away the money obtained by selling those shares – getting a tax deduction that also reduces his taxable income.

There are, of course, other kinds of property that Americans can donate, including artwork, vehicles, real estate and even cryptocurrency. While there are some unique considerations for each of those, the general rules discussed in the example above still apply.

In short, whenever high-income people give away property that is worth more than when they got it, they avoid paying taxes on the gain and they get an income tax deduction for the contribution.

But when they hang on for longer than a year to property they purchased for a relatively low amount and that increased substantially in value, they will reap the biggest tax benefits.

Should the gift be so large that it exceeds this maximum deductible amount in a given year, it’s possible to spread out this tax break for up to five more years.

Oprah Winfrey has given hundreds of millions of dollars to charity. Tom Cooper/Getty Images

Taking advantage of big donations

Timing tends to play a role in terms of how big a tax break donors can get from their charitable gifts. Because the government limits how much income-related tax liability the taxpayers can reduce through their use of the charitable deduction, wealthy donors benefit most in terms of tax reduction when they make large donations in years with especially high incomes.

Going that route avoids the risk of not being able to deduct the full amount of the donation from taxable income in a single year.

Although the taxpayer could carry the extra amount to be deducted into as many as five future years, there would be a risk that they might not have high enough income to make full use of that arrangement because what they earn can fluctuatea great deal.

How and why big donors do this

There are good reasons that rich people can afford to give away most or even all of their official income. People like Oprah Winfrey and Elon Musk are likely to have other resources to finance their lifestyles, such as investment income, immense amounts of savings or even borrowing.

And to be sure, there are many reasons wealthy Americans give away large sumsto charity that have nothing to do with tax breaks or accounting conventions.

Just like the rest of us, they may be generous by nature and want to give back by supporting a given cause they care about, whether it’s helping low-income students finish college without piling up lots of debt or increasing public access to the arts.

Read the original article on The Conversation.

Tags

Eric Allen

The Conversation

Tesla

Disrupting VC Assumptions About Tax Benefits

ilseu — Wed, 11 Aug 2021 20:25:50 +0000

Disrupting VC Assumptions About Tax Benefits ilseu Wed, 08/11/2021 - 13:25 More News Holly Ober August 11, 2021

Startups backed by venture capital — and their investors — often lose tax savings because they organize as corporations rather than limited liability companies, finds a UC Riverside-led study.

Eric Allen, assistant professor of accounting

The reason? Venture capitalists, or VCs, are more familiar with corporations, or C-corporations, and pay less attention to taxes, even though limited liability companies, or LLCs, have significant tax advantages that outweigh potentially higher initial incorporation costs. Investors in companies included in the study together paid $43.9 billion more in taxes than they would have if those companies had organized as LLCs instead.

“We find VC investors are forgoing significant tax savings mainly due to things like path dependence and ‘hassle’ as opposed to the standard cost-benefit analysis that most people assume,” said corresponding author Eric Allen, an assistant professor of accounting at UC Riverside. “It really shows how a tendency to just stick to the default option that everyone else uses can cause even sophisticated actors to make inefficient decisions.”

It’s all about the losses.

When a firm starts operation it has to choose the organizational form under which to conduct business. For the majority of startup firms, the only forms that provide the desired ownership attributes, such as limited liability and equity-based incentive compensation, are the C-corporation and LLC. The increased tax savings from the LLC are attributable to two dynamics: The tax treatment of the different organizational forms, and the fact that the majority of startup firms generate losses in their early years and cease operation without ever achieving profitability.

Here’s a simple stylized example to illustrate how this might look in practice. Assume we have a startup, LOSSCO, which generates a loss of $1,000 and then ceases operations. If it is organized as a C-corporation, it would be taxed as a separate entity. This means that the loss is retained within the corporation and only provides a tax benefit if the firm eventually becomes profitable. Since the firm fails before generating profits, no tax benefits are recognized at the entity level. The owners of the firm can get a tax deduction as a long-term capital loss against their other capital gains. Because of the special tax rules regarding capital gains, this would provide a benefit at a maximum of 20%, or $200.

Alternatively, if LOSSCO is organized as an LLC there would be no entity level tax. All profits and losses would flow immediately to the owners for immediate taxation. In this case, it means the $1,000 loss from the entity can be immediately deducted from the owners’ other income. If we assume the investor faces a tax rate of 35%, the tax benefit of $350 is substantially higher than if it were organized as a C-corporation.

While most industry participants are aware of the potential tax savings, they generally assume the higher costs or difficulties involved in filing taxes and other regulatory paperwork as an LLC will exceed any benefits. However, until now, the magnitude of the benefits has not been rigorously investigated.

Allen and co-authors Jeffrey Allen of Bentley College, Sharat Raghavan of UC Berkeley, and David H. Solomon of Boston College, examined the initial public offering, or IPO, prospectuses for 1,155 VC-backed public firms listed between 1997 and 2014, 98% of which were C-corporations. Ninety-two percent of the total firms reported a net operating loss just prior to going public. Most either failed or were acquired without being able to take advantage of tax savings on their losses.

The authors found that, had the startups registered as LLCs, investors could have used the losses to completely eliminate taxes from the remaining 8% of profitable firms. The remaining losses would then be passed through to shareholders and could be used to offset other taxable income. VC-funded firms that did not conduct an IPO had even higher potential tax savings.

When they combined the IPO with non-IPO samples, the authors found that switching to the LLC yielded an overall tax savings of $43.9 billion — approximately 4.9% of invested equity or 3% of estimated net payoffs. The potential tax savings were far greater than the few higher costs and difficulties of being an LLC, making the norm to incorporate look even more irrational.

Further investigation revealed venture capitalists often urge startups to reorganize as C-corporations simply because it is the form with which they are most familiar and want to avoid what they perceive as the “hassle” of LLCs. This “path dependence” allows an inefficient form to persist over time because its sheer popularity lowers the perceived implementation cost for each participant.

“The most surprising thing is not that some firms are C-corporations, but that essentially they all are. The people who should be most annoyed are taxable VC investors, since they are the ones that bear most of the costs under the current setup,” Allen said. “But since they don’t seem to push the VC managers to demand better startup structures, the industry just sticks with the ingrained practice.”

The paper, “On the tax efficiency of startup firms,” is forthcoming in the Review of Accounting Studies.

________________

^{Header photo: Leon Dewiwje on Unsplash}

Tags