After the much advertised delay in sending out refunds, it’s finally time. In this week’s episode, the focus returns to that once a year so-called pay day that everyone gets all worked up about. “The Tax Refund” Like a windfall, a breathe of fresh financial air. Sometimes it’s spent in our minds 19 times before we even get it, just the idea of getting it. The tax refund is maybe one or two steps away from becoming a holiday, just so folks could have even more time to go spend some of that tax refund money. The car dealers, creditors, retailers and anyone else that typically have slow January sales are all anxiously waiting as they know people are getting the refund checks. Maybe there should at least be some slick moniker like “SupeR Black Friday” or maybe “GAAP Friday”. Either way, there’s a lot of opportunity at this time of year for both making good moves or setting the stage for trouble during the rest of the tax year.
This is the holiday season and you probably deserve to give yourself the gift of of financial fitness. At the end of the year during holiday season there’s still time to wrap up 2016 and put a big bow on it. The Personal Finance Holiday List focuses on maximizing deferred savings, reducing taxes, giving gifts that keep on giving and optimizing your credit profile so you’re not paying the interest that allows other customers to get teaser rates. Keeping yourself financially fit ultimately allows you to go out and buy gifts for whoever you may desire, you included. Just remember, charity starts and home, then travels abroad.
There are a lot of questions, concerns and just plain old curiosity surrounding the Brexit situation. Following our own financial meltdown in the United States and all of the crazy things that followed ranging from job losses, to people literally walking away from their homes and mortgages to portfolios getting completely crushed. People lost money like it was going out of style. So what’s up with Brexit, is it something like that? Will there be those sorts of residual problems? News reports are talking about 401k’s and IRA’s potentially taking a hit. What should someone do if anything right now? Financial Advisor, Camari Elllis breaks down the Brexit, the EU, Euros and what you should consider before making any presumptuous money moves.
OR… Maybe there is a OPPORTUNITY presenting itself loud and clear, just yelling “Over here, now is the time!” Remember Baron Rothschild, “buy when there is blood in the streets”.
2016 is in full effect, and although there’s still some of last year lingering around for tallying taxes, earnings, dividends, losses, 2015 is still pretty much in the bag. Once you get the 1099’s out of the way you’ll have the hard figures on what you made saved and maybe lost. 2016 is the focus now, I usually give myself a month or even two to really iron out and commit to new year goals and so called resolutions. It takes about a couple of months just to be sure if the new goals are worthy, not too lofty and not too easy, no matter what they’re usually never too easy.
This year a new twist, targeting a savings or investment account and trying to MAX it OUT, through contributions of course. Selecting a retirement account, education savings account or something similar and making the MAX contributions for the calendar year. Some folks this will come fairly easy, for the majority it’ll be a set it and forget it challenge and a few others will maybe need to put this challenge in perspective for their budget. Regardless of budget, economic status and earnings it is fairly universally agreed everyone should be saving for a rainy day, cloudy at least. That being considered, there are many avenues to save that pretty much applies to everyone in some way or another. There are 401k’s, 403b’s, 457’s, Coverdell ESA’s, MMA’s, Government Savings Bonds, ROSA’s (Regular Old Savings Accounts), IRA’s, Roth IRA’s, Roth 401k’s, 529 Plans and the list goes on. Thing is, most of these accounts have some sort of maximum amount you can contribute annually, primarily because the majority have some money saving features whether it’s through deferred taxes on contributions or tax free earnings on contributions. Whatever your flavor or purpose, you’re probably enrolled or have one of these set up someplace, at work or elsewhere. When it comes to waiving of taxes on earnings or contributions, the government is involved to authorize that sort of thing, and they also put caps and limits, check out Retirement Plan limits and details for the most up to date and accurate information for plan limits and specific details. Many folks never really hit the caps or limits set or even know they exist. In today’s show, to kick off 2016 we’re focusing on identifying the limits and choosing one of these accounts to max out for 2016. Regardless of our budget, we’re going to figure a way to MAX OUT for 2016.
During a recent conversation with a friend over the pros and cons of a new business venture, I mentioned some of the typical building blocks to getting new ideas off the ground, up and running. Things such as correcting identifying the product, market, location, source for goods to be sold and forecasts of how much money is to be made from the business. The discussion took the usual twists and turns with high levels of optimism regarding the possibilities of success, I maintained a position of focusing on the basics. For me, such basics include the number one thing is having an “Exit Strategy”, as I stated in an earlier post “Top Ten Things …” and secondly to get a business plan. A very simple and hidden truth is that many people do not get a business plan. Not so much because they don’t want to or are unable to, but there are some not so popular things that come out of a business plan. It tends to reveal the shortcomings in a business idea, and at a time when optimism is very high it can come across as a negative amid all the positive energy flow. When the positive juices of a new business idea are flowing, quick answers are shot out to any “pessimistic” revelations just to keep the idea alive and in play. Even a general overview of a business plan will ask some for details on some very basic questions and maybe shine light on some quick answers. Here are a few simple questions you may answer doing a business plan: Who will you sell to? Where will you sell? Where will you get the necessary monies to start the business? How long will it be before you make a profit? How much will you sell the goods and services for? What differentiates this business from its competitors? Who will do the work? How will you pay your employees? What are your business hours? And, and…
While my friend and I went on to have many follow-up conversations focusing on specific details of marketing and such, this conversation ended up focusing on financing the business. Financing a business is one of those questions that may have a straightforward answer or some put together bits and pieces sort of replies. Typically, if you were to go look up how to finance your business there would be a ton of information on getting business loans, leveraging you assets (typically your home), leveraging your Friends & Family network, or dipping into your savings and possibly retirement savings. While the world would have you think that many folks are going about getting up this financing by walking into the local bank or credit union and getting a loan, well not so much. What people are doing is everything else, ranging from selling their assets such as a car or something to dipping into their retirement in order to get started. The idea being to get the financing, focusing on the profitable upside and anticipating making up the difference for any financial sacrifices once the dough comes rolling in. Surely, in most cases the business type and the amount of financing needed will determine the sources used. If you’re going from hobby to hustle, you probably could finance that yourself and test the water on whether or not you can make money from doing your hobby for others. Going from “Side Hustle” to mainstream is the middle ground you might use any money from anywhere, and is usually the biggest leap anyone will take as it will have less assurances for the new commitment but the greatest amount of pure optimism. Then there’s going straight to the business model from the beginning and will probably require focused funds from the start, whether it’s bank, home or retirement fund. Although, I will say going the bank route is good for one thing if nothing else at all, and that is they will demand a worthwhile business plan that makes some sense.
Besides the bank, there is this retirement fund and while advisors left and right advise not to touch this fund, many people do. And it seems that advisors are closing their eyes to this fact just as much as the people who raid their retirement funds ignore the warnings of financial advisors not to do so. Now that we know that this one of things that people are doing to finance their entrepreneurial dreams, it may be good to consider the relative options and possible drawbacks. As my friend and I talked on, he mentioned using his retirement account to fund his new venture and was considering a lesser known path called Rollover as Business Startups (ROBS). In a nutshell, you are able to rollover you retirement account with no penalties into a “C” Corp business that you startup. Typically there is a sponsor involved to walk you through the administrative process and as usual with the IRS there’s plenty paper work and qualification boundaries to work within and maintain. It seems the part of the tax code that details ROBS is simply to allow people to reach into their retirement funds without worrying about penalties and such. If they are going to use that money to start a registered “C” Corp business, in many cases franchises and Real Estate investments or both. Franchisors are set up to help potential franchisees to get started by taking the ROBS path for financing their new business. Becoming ever popular during a recessionary time between 2009 and 2013, many employees that faced layoffs and business shutdowns took this option in order to take control and finance their individual dreams. For some, ROBS allowed setbacks to be turned into an opportunity, using entrepreneurial spirit through and through.
There’s a lot of information out there regarding ROBS, however, it lacks the all-important requirement to do the due diligence of creating a business plan. While you may never actually finish a business plan, it’s considered to be a living document, getting one started is essential to staying grounded on where your business is going. However, if you’re considering a bona fide franchise option from one of the well-established franchisors, then you should be okay because they take of that for you. If not, you’ll definitely need an attorney and a sponsor to get you going and to keep the attorney within reach as you’ll need guidance to maintain the status and not get caught up with later on for non-compliance.
What about the majority of folks that will take from the retirement as a loan or as a flat disbursement? As far as the flat out disbursements, the financial advisor is right on that, simply a no-no. However, that same financial advisor isn’t always dealing in reality, the reality of people seeing their dreams come within reach and that retirement fund being able to get it going. That’s the reality people with the entrepreneurial spirit face all of the time. So for those folks, first things first… if you are able, pay any taxes or fees upfront for early withdrawals, disbursements, etc. if the plan provider allows. That will offset that costs later for taxes due, potential penalties, interest and fines that get tacked on to those amounts. Secondly, keep accurate records of all finances and costs to start and run your business, you’ll need this for tax time. When you file your taxes it is very likely that the costs of starting and running this business will outweigh any fees or penalties for early withdrawal for the tax year, this will reflect as a refund, use this refund to offset any penalties or fees you need to pay for dipping in the retirement pot. Any tax refund received should be used for that purpose until all fees or penalties are paid up. As a new business, it is very likely you don’t turn a profit in the first year, maybe even a few years and you should know that from your business plan -maybe. Sure there will be plenty of revenues, but profits are typically slim in the beginning and if you’ve done a half decent business plan you would be somewhat prepared for that.
Some things to consider regarding financing your business.
Where will you get the money and how much will it cost? Home refi, 401k, Bank Loan, F&F Network, Savings. What will be the interest and how long will it take to pay it back?
If you are not able to or don’t pay it back, then what? Now’s a good time to be honest with yourself and have some sort of plan or at least get familiarized with any penalties or consequences of not being able to keep up your commitments.
Having the money to execute decisions can somehow magically dampen creativity. It’s amazing how creative you can become once the money runs low. Write these ideas down for when you do have money to finance them if they still make sense then.
Having the money to execute decisions somehow seems to make you think all of your ideas are great, even if they’re terrible. Develop a test of some sort as that any spending decision over a certain amount must pass, e.g. calculating the return on capital asset spending. Purchasing an illuminated sign for higher cost will attract more passerby business at night based on visibility and location. The test should include details such as how much more business, a time frame to measure the return and a specific proven target such as passersby or vehicular traffic.
At least attempt to do the business plan, or it may show up later that you didn’t. Likely in lost or slow revenues. Slow money (revenues) can send you scrambling and often opens the door to even worse ideas such as raising prices, which isn’t the answer to slow revenues in most cases.
Using free resources such as S.C.O.R.E. and the SBA are worthwhile to leverage real world experience from old pros, they’ll show you how to evaluate what you’re getting into financially. Just don’t get lost, they can be idealists at times.
It’s a priority to understand Profit and Loss statements, forecasting, operating expenses versus capital expenses, insurance, and taxes.
Of course financing such a risky thing as a business takes some serious guts and gusto when you’re using your own money instead of a bank loan, money that’s probably been saved over a long period of time. Even if you do offset the taxes, fees or penalties with refunds from losses, don’t forget the opportunity cost of lost potential for those investments to grow. There are many other ways, such as taking a loan from the fund, using the loan to buy a property that pays back the loan from rents collected and also allows for you to leverage the property to invest elsewhere such as your brother’s mechanic shop. You’re still missing the upside potential of the money taken out, but if it’s getting you rents on an appreciable property, that’s not too bad because you’re recouping it elsewhere. I just had to add that for the finance advisors, they do have your best financial interests at heart –sometimes.
My colleague, is still in the planning and evaluation stages to see if he can make a profit in his market. He is also considering working with a franchisor which is always an option worth considering since they’ve developed markets, brands and can answer many of the finance related questions related to profit and loss. And, of course they can facilitate the ROBS option for those interested. But is the 5 -15% royalties, fees and use of their puffed up proprietary or required approved equipment worth it? I’m sure he’ll find out, soon.
Retirement Income Strategies for Those with Less Than a Hefty 401k, IRA, or Pension.
We hear or read about it all of the time, either the stats of how many Americans aren’t saving enough in their 401k’s for retirement or how important it is to build a retirement strategy that includes a 401k and a maybe a pension too. But really, are these people talking to or about everyone? Does everyone have all of their retirement plans in the bag but you? Conversely, we also hear about all of the hundreds of thousands that are unemployed or affected by the 7 year long recession, so it doesn’t all really make sense at times. Even a hefty emergency fund alongside extended unemployment isn’t built to last 5 years! Are these unemployed folks still funding some 401k or IRA somehow? Obviously not, so for the rest of us who aren’t in the “prime” zone financially, that aren’t set just yet and whose retirement plans will be a combination of jobs worked, savings and creative financial planning, there are some key things to focus on early.
What if you don’t have a healthy well vested 401k or other retirement plan, what will you do for retirement income? Do you have a pension from your current employer? How long can you do your current line of work, until you’re 60? 70? 75? Will you be physically able to work in your later years? Will your pension be enough if you have one? The ever daunting question that begins to come clearer and clearer as time goes on ad you do happen to survive all of those near misses in life leading into your thirties. Banks and brokers are offering cash incentives to do your rollover with their firm, so many of us don’t have a rollover. So many of us don’t have the $200,000.00 or more rollover to get the free $500.00
The conventional wisdom states to start saving in your 20’s and you can save up to one or two million dollars by the time you retire and do just fine meeting your living expenses from 4% – 10% of that savings a per year. That 4% – 10% is supposed to come from interest, etc. and it sounds like a great idea, if I had a brain in my 20’s… or um, my 30’s. So now what? There’s socking away as much as you can in the 401k now at the job you’ve working at for the past maybe 8, 10, 15 years… maybe. Speaking of maybes, there’s maybe a pension for some of us, if you’re lucky because that is disappearing with the clouds these days unless you work in the public sector -with no guarantees still. Well, if none of those fit you, again, then what?
There are Roth 401k and Roth IRA annual contribution limits of about $15,000 or $5,000 annually, give or take some details. About $10,000 limits or so in Education IRA’s if you plan to stash and dash there, but that’s not tax free contributions, only growth so it doesn’t matter anyway. And we can’t forget the high yield savings accounts that get a whopping 1%, so you’re only about 1% down every year behind inflation, At best it’s a money pit stop, but don’t get too comfy trying to reach “0%” interest by getting a high yield savings account in order to keep with inflation, easier said than done. Let’s not forget Social Security, if you’ve worked and paid into the system. The government sends letters every year with the estimates of how much you could expect if you were to retire today. Is it enough to cover your living expenses where you live and how you live today? Don’t fret, because there’s always something, some ways to make it happen for those who refuse to play dead. Ways to make to retirement moves that offer relative safety of principal invested and potential growth too. You just got get to doing it.
There are many strategies ranging from setting up annuities to inventing the iPhone and the all-time worst, the ”Lump Sum” plan. Here are three strategies that anyone can employ regardless of where they are on the retirement horizon as long as they willing to work at it.
Leverage Peak “Earning Years”. The largest opportunity that exists is taking advantage of your “Earning Years” as they reach a plateau. These will be the years you can take risks, make very aggressive moves, change directions while you are at your highest level of marketability, skills are sharp and current, knowledge is current and relevant, you’ve earned your worth and know what it is. You’ve reached a point of having enough experience to command the high rate for what you offer to any employer. During these years you can lay real plans and execute them. If retirement savings isn’t caught up to where you are or want to be, then your peak “earnings years” give you one last great opportunity and they can easily last about 10 -25 years depending on your type of work.
Create Small Business, the business of You. If you have skill, talent, knowledge set, or a specific ability that is marketable then cultivate it further. So start by becoming fully invested in you, become licensed, certified, more educated or get whatever credentials necessary to operate as a small business with the intent to hand over the “production” part of the business to someone else while you still own it. Consider that even doctors and dentists have private practices where other doctors and dentists are in their employ. This may or may not last into retirement depending on the line of work, however, it does offer the possibility of getting up some serious savings from income for investing or just keeping safe. For example if you are handy or a mechanic, becoming a contractor and then hiring capable employees to carry on doing the work while your run the business. Same goes for everything from hairdresser to real estate agent to painter or car mechanic. Yes there will be some upfront investment of both time and money, yes you will need to step up your business savvy, and yes there is some risk. Just keep in mind, you are also taking the bull by the horns, by providing these answers for yourself.
Income Generating Real Estate. In any case Real Estate is an available avenue to consider, building an income property portfolio or adding it to your current retirement plan can give it a boost if done properly. Consider first building up the necessary monies and position to make quality real estate purchase in a moderately high demand market. Try to stay away from low rent and problem areas as much as possible, although they have profit too, they also require much more hands on management at times. Consider the ongoing costs of maintenance and management for everything from water leaks to tenant evictions. This isn’t something most people want to do in retirement, so be prepared to give up to 15% for this to get done, it’s deductible so keep it simple and let someone handle the potential headaches. Focus on a market close to your area of retirement. Most people have some time between now and retirement to get this done by building up savings, taking care of any credit issues, learning the ropes and locking in their income generating properties.
There are still the usual routes of saving and investing in everything from bonds, REITS, ETF’s and mutual funds and they are as good as the hundreds of other plans the finance gurus come up with. Still, for the rest of us, we may need to put together a plan that is workable to add on to the savings and investment plan that is something we can work on and cultivate. Unless you really have a ton of money invested in a mutual fund, ETF or somewhere else in the general market, then it’s just sitting… not doing much, just there, sometimes it’s up, sometimes it’s down. Some of us are hard line go getters in life and will need to take more of an active role, and feel encouraged as their plans come to fruition right in front of their eyes, that’s what this post is about. All the while, saving and investing the profits.