Category: Personal Finance

Habits of the Wealthy

My last two posts have mainly focused on the internal world (thoughts) of the wealthy. Success, however, is a combination of our attitudes (internal) and our habits (external).

Before I go any further into today’s post, I want to clarify a few things:

  • Wealth does not (automatically) equal success. If fact, you can find story after story of wealthy people who are estranged from their families and have no real friends. However, while the media loves to focus on those types of stories, there are many stories of wealthy people who are very successful in other areas of their lives as well.
  • You may not want to be wealthy. Wealth brings additional challenges that some people may not want. The habits and attitudes defined here, however, can help in any area of your life.
  • We are not wealthy (yet). We are doing better financially than we ever have, and I am confident that these habits will only improve what we have done.
  • These posts only apply to those in a free-market economy, such as America. Being born in poverty in a third-world country brings an entirely different set of challenges. People born in poverty, however, can rise out of it using these types of habits.

If you would like to be better off in the future than you are now, however, this post, and my previous two posts, should help.

rich habitsMy post today is based on some great research that Tom Corley has done. He spent five years studying the habits of the wealthy and the poor. Tom’s family was wealthy until he was about 10, then they lost everything overnight and lived in poverty the next 11 years. Tom didn’t want to live this way – he wanted to know exactly what wealthy people did to become and stay wealthy. Here are some key findings from his five-years of research:

  1. The wealthy live within their means. They save approximately 20% of their income and spend no more than 25% on housing, 15% on food and 10% on entertainment. This reminds me of one of my favorite quotes about millionaires:

    “Millionaires become millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.” -The Millionaire Next Door

  2.  

  3. 88% of the wealthy read at least 30 minutes per day about their career, education or for self-improvement. Only 2% of the poor do this. 63% listen to audiobooks as they commute, while only 5% of the poor do this.
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  5. 67% of the wealthy watch less than an hour of TV per day. 77% of the poor watch more than an hour of TV per day. Instead of watching TV the wealthy work on hobbies, or side businesses, or they volunteer and network.
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  7. And speaking of volunteering… 3/4 of wealthy people volunteer with an organization or cause they believe in at least 5 hours a month, while only 10% of the poor do this. Volunteering is a great way to network as well.
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  9. 62% of the wealthy are focused on at least one major goal every day. Only 6% of the poor do this.
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  11. The wealthy wake up early – 44% get up three hours before their work day begins. 3% of the poor do this.
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  13. 81% of the wealthy make and prioritize a to-do list the night before, while only 19% of poor people do. In addition, they focus on the tasks – they complete, on average, 70% of their list.

There are other habits as well, but these seven are a good starting place. If you were to pick one or two of these to begin focusing on, what would you choose?

My plans are to work on:

  • Listening to audiobooks as I commute
  • Waking up earlier
  • Prioritizing my to-do list the night before

I would love to hear what area you are focusing on – please leave your comments below!

The Five Lessons a Millionaire Taught Me About Life and Wealth by Richard Paul Evans

Let me share with you a few book titles on my bookshelf that have to do with money:

  • Think and Grow Rich
  • How Rich People Think
  • As a Man Thinketh
  • Mind Over Money
  • Wired for Wealth – Change the Money Mindsets That Keep You Trapped
  • Conscious Finance

Did you catch a theme there? It was something I hadn’t really noticed before. Clearly, according to these authors, wealth has more to do with your mindset and your thoughts than your habits.

5 lessonsToday’s post deals with that same concept. I am going to review the book The Five Lessons a Millionaire Taught Me About Life and Wealth by Richard Paul Evans (#1 New York Times bestselling author of The Christmas Box). I picked up a copy at the local library and read it in one sitting. It’s an easy read (93 pages of content and an additional 70 pages of resources), but definitely worth your time.

Evans learned these lessons at a young age from a millionaire and went on to change his mindset, incorporate them in his own life, and make a lot of money. He teaches five lessons or principles that he says will lead all who follow them to wealth and financial independence. In fact, he says that all wealthy people share this common denominator – they understand the principles of accumulating wealth and follow them (and by wealthy he isn’t talking about those who win the lottery or inherit a fortune then go broke 5 years later, but truly wealthy people who earn and keep their wealth).

None of these principles are new – you won’t find anything earth-shattering in the five lessons. In fact, they will seem very ordinary to you. However, very few people actually follow them. I discovered areas that I can improve and plan to sit down with my wife so she and I can decide together how to better live some of these principles. I also plan to teach these principles to my children in ways they can understand.

Here are the five lessons:

Lesson One: Decide to be wealthy

Evans says this is the most important principle and that wealth is a mindset – it’s all or nothing. Bryan Tracy, another one of my favorite authors, says that it never occurs to most people that they can be wealthy and that “the primary reason for underachievement and failure is that the great majority of people don’t decide to be successful. They never make a firm, unequivocal commitment or definite decision that they are going to become wealthy. They mean to, and they intend to, and they hope to and they’re going to, someday. They wish and hope and pray that they will make a lot of money, but they never decide, ‘I am going to do it!’ This decision is an essential first step to becoming financially independent.”

Lesson Two: Take responsibility for your own money

You need to know how much money you have (by calculating your net worth monthly and annually), know where your money comes from and where it is going (budgeting). If you don’t control your money it will control you.

Lesson Three: Keep a portion of everything you earn

As George Clason says in The Richest Man in Babylon “a part of all I earn is mine to keep.” Evans says that millionaires save between 15-20% of their income and recommends that you start with a minimum of 10% of your salary and 90-100% of any side earnings.

(Consequently, the book The Richest Man in Babylon is one of my favorite books about money – you can read it for free here: http://www.ccsales.com/the_richest_man_in_babylon.pdf).

Lesson Four: Win in the margins

This principle is the one that will help you increase your nest egg as quickly as possible. The basic idea is to look for ways to increase your income and decrease your expenses. Evans goes through a number of different ways to look for deals and decrease expenses. He says that one of the best ways to save money on a purchase is to ask “Is that the best you can do?” This seems to especially be true with high-ticket items.

Lesson Five: Give back

Evans donates 10% (or a tithe) of his money and says that he has never felt the loss of the money but instead has felt specifically blessed for his contributions. My wife and I do the same thing and feel the same way that Evans does.

Those are the five lessons. Are you surprised at all by the simplicity? I would guess that you are. Like I said, none of the ideas are earth-shattering revelations. How many of them are you actually living, though? If you are intrigued by these ideas I highly recommend you pick up a copy of this book and make some plans to improve.

How Rich People Think

by Ryan Law

How Rich People ThinkI recently picked up a copy of the book How Rich People Think[i] by Steve Siebold. In the book Siebold shares 100 lessons he learned over a period of 26 years as he interviewed some of the wealthiest people in the world. The book reminds me of a few of my other favorite finance books, including The Millionaire Next Door and Think and Grow Rich. These books don’t focus on money per se, but how rich people think and act.

In today’s post I will share several of Siebold’s lessons.

#13 Middle class believes money is earned through labor…World class believes money is earned through thought

“The average person believes the harder they work the more money they’ll make. Their linear thinking equates labor and effort with financial success. This is why most people aren’t rich. They’re following an outdated model of success…The rich know that creative thinking is the highest paid skill in the world.”

This idea of creative thinking is a theme throughout the book. Siebold mentions numerous times that the best thing you can do is work on training your mind to find solutions to difficult problems. “The rich get richer,” Siebold says, “because they know the world is overflowing with wealth disguised as problems that need to be solved.” One way he recommends you train your mind is by investing at least one hour per day studying subjects that will help you move toward your vision.

#20 Middle class earns money doing things they don’t like to do…World class gets rich doing what they love

Surely you have heard the philosophy that you should “do what you love and the money will follow.” Do you believe that is true? On the last day of my class each semester I ask the question “How many of you truly believe you can do something you love and get paid well for it?” Most students raise their hands, but the reality is that most people don’t like what they do. Forbes reported on a study that showed that only 19% are satisfied with the work they do, 16% are somewhat satisfied and almost 2/3 of all people are dissatisfied, or unhappy in the work they do.[ii]

There is a great video narrated by Alan Watts called “What is Money Was No Object?” that discusses this theme. Here is a link to the video: http://www.youtube.com/watch?v=C_sbcSRMsOc

Siebold says that “…passion is the real secret of getting rich…The rich go to work every day feeling passion for what they do, and their passion fuels their efforts.”

#50 Middle class dreams of having enough money to retire…World class dreams of having enough money to impact the world

What is your major money goal? Siebold says “…the masses major goal with money is to retire at 65 and hopefully have enough money to survive until they die. The world class, while often no more ambitious, set their sights on impacting the world with their wealth.”

Most people want to make a positive impact on the world. Think about some specific things you could do to make a difference for other people if you had the money to do it.

#58 Middle class have loosely defined goals with flexible deadlines…World class have highly defined goals with do or die deadlines

Jim Rohn, a famous speaker, author and consultant tells a story of meeting with his mentor, Earl Shoaff, for the first time. Shoaff said, “Let’s start with reviewing your goals.” Rohn said he didn’t have them with him so Shoaff said “Are they in your car? Why don’t you go get them so we can review them.” Rohn said they weren’t in his car and in fact he didn’t have any written goals. Shoaff then drilled into Rohn’s head the importance of having goals, and Rohn went on to equate this one principle with the majority of his success.

Siebold says only 3% of people have goals specific enough to generate the level of mental energy required for success, while “World-class thinkers focus on the single most important goal they desire and set a deadline for its achievement…Their do or die commitment to building a financial empire virtually guarantees their success.”

Here are a few of Siebold’s other lessons. World class…

  • Believes building wealth is a team effort
  • Focusses on money making activities
  • Has an action mentality
  • Takes calculated risks
  • Believes money is about freedom
  • Believes in self-reliance
  • Is internally motivated to make money
  • Believes starting a business is the fastest road to wealth

I encourage you to read books like this that challenge your thinking. You may not agree with everything Siebold or other authors like him say, but I believe it is a healthy thing to read things like this and seek for ways to improve your thinking.

 

[i] ISBN 978-0-9755003-4-7 Published by London House Press

[ii] http://www.forbes.com/sites/susanadams/2012/05/18/new-survey-majority-of-employees-dissatisfied/

Finding Financial Wellbeing

wellbeingA while back I was given a copy of the book Wellbeing – The Five Essential Elements by Tom Rath and Jim Harter. In this book Rath and Harter look at the five essential elements that shape our lives: Career Wellbeing, Financial Wellbeing, Physical Wellbeing, Social Wellbeing and Community Wellbeing.

In the introduction to the book the authors say “Wellbeing is about the combination of our love for what we do each day, the quality of our relationships, the security of our finances, the vibrancy of our physical health, and the pride we take in what we have contributed to our communities.”

For today’s post I am going to go into more detail about Financial Wellbeing.

Financial Wellbeing is about effectively managing your economic life. The authors note that it is difficult to be happy in any area of life if you cannot meet your basic needs (remember Maslow’s Hierarchy of Needs?), but that the amount of money we have, beyond a certain point, has less of an impact on our overall wellbeing than the concepts of “financial security” and effectively managing our finances.

“People with high Financial Wellbeing manage their personal finances well and spend their money wisely. They buy experiences instead of just material possessions, and they give to others instead of always spending on themselves. At a basic level, they are satisfied with their overall standard of living.” (Rath & Harter, 2010, p 154).

There are several important concepts in that statement. People with high Financial Wellbeing:

  • Manage their personal finances well
  • Spend their money wisely
  • Buy experiences instead of just material possessions
  • Give to others
  • Are satisfied with their overall standard of living

Let’s discuss a few of those concepts.

Give to Others

The authors cite three studies that show that spending money on yourself may temporarily make you feel good, but after time that good feeling fades. While spending money on yourself does not boost wellbeing, spending money on others does. When we help others out we feel good, even if it is just a little bit of money. For more detail on this subject, see “Why Giving Matters” (https://ryanhlaw.com/why-giving-matters/).

Buy Experiences

While spending on material goods doesn’t increase wellbeing long-term, spending on experiences does.  Think about some of the material items you purchased over the past year, and then think about some of the experiences you purchased in the last year. Experiences can include trips or something as simple as going out to a nice dinner or going to a movie. Do the material items or experiences give you the most happiness? Most people would agree that experiences give them the most happiness. Things that come to mind for me are date nights with my wife, going to a movie as a family, and taking a trip over Spring Break. With experiences we get to look forward to the event, enjoy the event and have fond memories of it. It is interesting to note that for those that earn less than $25,000 per year experiences and material purchases show similar gains in wellbeing, but after $25,000 experiences provide two to three times the levels of wellbeing when compared to material purchases.

Manage Personal Finances Well

This concept brings us back to many of the things I have covered in this blog; budgeting, protecting yourself from identity theft, having a basic estate plan in place, saving for emergencies, investing for the future, etc. The authors also suggest you establish default systems, such as direct deposit, automatic deduction for investments and enrolling in your 401(k) at work so savings is automatic.

 

It is important to remember that all areas of Wellbeing (career, financial, physical, social, and community) work together. You can’t just focus on one area and ignore the others.

I recommend you read the book to see how you can improve your life in all five areas. http://www.amazon.com/Wellbeing-The-Five-Essential-Elements/dp/1595620400

Basics of Renters Insurance

apartment fireIf you live in an apartment and a candle tips over and starts a fire, who is responsible for the damage? What if a thief breaks in and steals your TV and other electronics? Is your landlord responsible to replace those items?

In both scenarios YOU, as the renter, are responsible for the damage or loss.

In the last two posts I have covered auto and homeowners insurance. These week I will conclude this series with a post about renters insurance.

Renters insurance typically covers theft, vandalism and fire (or smoke) damage. Some policies also cover water damage. Pipers bursting, sewage backup, earthquakes, floods and other “Acts of God” are typically not covered.

The three main parts to a renter’s policy are:

  • Contents
  • Loss of use
  • Liability

Contents

You may not think you have much of value, but the average renter has about $30,000 worth of “stuff”, from furniture to clothes to electronics.

Renters insurance will replace items stolen or damaged by a covered event.

You can get Replacement Cost coverage or Actual Cash Value coverage.

Actual cash value takes into account depreciation. For example, let’s say you own a $5,000 TV that typically lasts for 10 years. If that TV is stolen after 5 years you will get $2,500 for it from the insurance company.

With Replacement Cost coverage you will typically get a check for the actual cash value (in our example above you would get $2,500), then when you submit a receipt you will get a check for the remainder, up to a set dollar amount.

You should always get Replacement Cost coverage if it is available.

Most policies cover your items while you are travelling and some will cover items in your vehicle as well.

Before the insurance company will pay anything you have to pay your deducible. The higher your deductible, the lower the premiums will be. Be sure you have a deductible you can afford, though.

To prove what you own you should have pictures or a video of your contents. You may also want to have a list of what you own and how much you paid for it.

Contents coverage will typically only cover a limited dollar amount, so if you have an expensive or valuable item make sure your insurance agent knows about it and you can get additional coverage for it.

Loss of Use

If you have water, fire or smoke damage your apartment will typically be uninhabitable for some period of time while it is being repaired.

Loss of use will cover your rent in a similar apartment or hotel for a limited period of time.

Liability

Liability coverage will typically cover legal costs, bodily injury and property damage caused by your actions or negligence. It will also often pay a set amount for medical payments for your guests who are injured.

Cost

You will pay a monthly or annual premium for your coverage. Average policies cost between $15 – $30 per month.

For those that live in Utah, get in touch and I would be happy to get you a quote for renters, auto or homeowners insurance.

An Overview of Homeowners Insurance

homeowners-insuranceOne of the easiest ways to save some money is to do an occasional review of auto and homeowners insurance. Last week I wrote about auto insurance (https://ryanhlaw.com/an-overview-of-auto-insurance/) and today I will discuss homeowners insurance in more detail.

The majority of homeowners insurance policies will pay for most losses unless the loss is caused by something excluded. Things that usually aren’t covered by any insurance includes routine maintenance, damage from flooding[1] or landslides, damage from earthquakes, sewer backup and acts of terrorism.

PROPERTY PROTECTION

Four specific things are covered by the property protection portion of your insurance:

Part A: Dwelling and attached structures

This covers damage to your home and any attached structures (an attached garage, for example). For example, if your roof is damaged in a hail storm and you need a new roof Part A would pay for a new roof. If your stove catches on fire and your kitchen is destroyed, Part A will pay to repair the damage.

Part B: Detached structures

This covers any structures that aren’t attached to your main home – a detached garage, a storage shed, etc. Coverage is usually 10% of Part A. If, for example, you have $200,000 worth of insurance in Part A you would have $20,000 worth of insurance on Part B.

Part C: Personal property

This includes all the property in your home – your TV, computer, clothing, etc. It is important that you have a record of what you have in your home so you could prove what you owned if it was stolen or destroyed.

Coverage is limited for many items, so you may need a rider if you have a collection or expensive pieces of jewelry, furs, stamps, firearms, antiques, tools, memorabilia or other similar items.

You will have a deductible for the property protection portions of your insurance – standard is $1,000, but if you have the cash you can raise your deductible which will lower your premium.

You want to look carefully to see if you have replacement cost or actual cash value. Replacement cost will pay for a replacement (i.e. if you have a 25-inch flatscreen TV that is stolen you will get a new 25-inch flatscreen TV). With actual cash value depreciation is taken into account. If your 25-inch flatscreeen is 5 years old and the insurance company figures that TVs last for 10 years you will only get about half the cost of a new TV.

Part D: Living Expenses

If you can’t live in your home while repairs are being made or while it is rebuilt this portion will help pay for similar living expenses.

LIABILITY COVERAGE

The other part of homeowners insurance is liability coverage – which provides coverage for personal injuries or property damage that you or others living in your home may be responsible for.

This portion covers the cost of your defense regardless of whether or not you are found liable. If you are found liable your insurer will cover damages up to the total of your liability coverage.This can be on or off your property and it does not cover intentional acts.

Included as part of liability insurance is medical payments to others that will help pay the doctor’s bills for people injured by you, a family member or your pets.

Other standard coverage includes:

  • Fire Department Service Charge, which will pay the cost of a fire department run
  • Debris Removal coverage, which pays for the cost of removing damaged property

As a reminder, for those that live in Utah, I am happy to review your homeowner’s insurance coverage and run a quote against a number of the nation’s highest rated companies to see if I can save you some money.

[1] Flood Insurance is provided by the federal government – you can access that at www.floodsmart.gov

An Overview of Auto Insurance

auto accidentAuto insurance is one item that we buy hoping that we will never have to use it. While I don’t know anyone who enjoys paying for it each month, we understand it is important (and it is required by law if you own a vehicle!) so we go ahead and keep paying for it.

However, just because you have to pay for it doesn’t mean you should be overpaying for it. When was the last time you reviewed your coverage? While this may not be the most fun you will have in an afternoon, if you haven’t reviewed your insurance documents recently, you may be missing out on some cash that you can apply to some of your other financial goals.

Today I am going to briefly review auto insurance and give you a few tips for how you may be able to save some money on it.

Your auto insurance has several different types of coverages:

  • Bodily Injury Liability per person
  • Bodily Injury Liability per occurrence
  • Property Damage
  • Uninsured/underinsured coverage
  • Comprehensive
  • Collision

Bodily Injury Liability per person

If you cause an accident, this coverage covers people outside of your vehicle who sustain injuries. Whatever the amount is in this section (i.e. $30,000) is the maximum your insurance will pay for each person who is injured.

Bodily Injury Liability per occurrence

This is the same as the bodily injury per person, but it is the maximum your insurance will pay per occurrence. For example, if you have $30,000 in coverage per person, and $60,000 per occurrence and two people are injured by you and have bills of $35,000 each, your insurance will only pay $30,000 for each one because they reach both the limit per person and maximum per occurrence.

Imagine that there were four people injured and each had $30,000 worth of medical bills. How much does each person get then? $15,000 (maximum of $60,000 per accident – $60,000 divided by four people gives you $15,000).

Property Damage

If you cause an accident this covers property that is damaged – whether it is a mailbox or other vehicles.

For bodily injury and property damage state minimums are usually fairly low. For example, in Missouri it is $25,000 per person, $50,000 per occurrence and $10,000 in property damage. In Utah it is $25,000 per person, $60,000 per occurrence and $15,00 in property damage. Hopefully you can see how quickly you can surpass these limits. You can cause more than $10,000-$15,000 in damage in even a fairly minor accident.

I strongly suggest you purchase the highest Liability (Bodily Injury and Property Damage) that you can afford. Increasing these will give you peace of mind that if you cause an accident you won’t personally be liable for medical bills and property damage up to a high limit. I actually don’t sell any policies that are less than $100,000 per person, $300,000 per occurrence and $100,000 in property damage (or 100/300/100).

Uninsured/Under-insured motorist coverage

If someone who is uninsured or under-insured hits you and you are hurt, this clause of your insurance will help pay your medical bills. Some states require you to have some uninsured motorist coverage.

Comprehensive

This coverage pays out when your vehicle has been damaged in some way (except in a collision). For example, if your vehicle sustains storm damage or a vandal keys your car this coverage will help pay to fix the damage.

Collision

If you hit something (car, tree, pole, etc.) this coverage will help pay to fix the damage.

Both comprehensive and collision have a deductible that you will have to pay before the insurance company kicks in any money.

Money Saving Tips

My first tip to help save you money is to review your deductible for comprehensive and collision. If you can afford to increase your deductible I would encourage you to consider it. You would be responsible for meeting the full deductible before any damage is paid out, so you would need cash set aside in your emergency fund to help pay this, but increasing your deductible will save you money on your monthly bill.

If you drive a very old, essentially worthless car that is paid for consider whether it is worth keeping comprehensive and collision. If your car was totaled and the insurance company would only pay you $200 because that is all it’s worth then you are probably better off dropping this coverage. Keep in mind that if your car is damaged (other than in an accident that someone else causes) you would then be liable, in full, for any damages to your vehicle.

Finally – shop around for quotes occasionally. Have you been with the same insurance company for ten years because you saw an ad that said they can save you 10% on your car insurance? It never hurts to check around to see if you can get the same or better coverage for less money. You can usually get a few quotes online fairly easily. You can also check with an independent insurance agent who can shop a number of different companies and find you the best deal.

For those in Utah, I sell auto and home insurance and actually take care of the shopping part for you. My company rate-shops 10-15 companies to find you the best deal. Contact me if you would like more details.

Know Your Score

by Ryan H. Law

If you want to achieve any goal you need to where you are now, what your desired result is and the steps you need to take to get you there. For example, if a person wants to lose weight they would need to weigh themselves, set a target goal for what they want to weigh, and set up steps to get there (exercise, diet, etc.).

Knowing your numbers is important – the only way we can improve is knowing where we are today! Many of us get annual health screenings – you check your cholesterol level, blood pressure, and other health measures. If you play a sport regularly you know your speed, handicap or other important stats.

There is another number that you may not have thought a lot about but it plays a major role in your life. Here are some benefits of having a high score:

  • You pay less for your car insurance
  • You may get that coveted job
  • You will be able to get in to the apartment you want to live in
  • You will pay less (sometimes substantially less) for loans (including your mortgage, auto loans, personal loans and others)

If you haven’t figured it out already – I’m talking about your credit score. In this post I would like to discuss your credit score and why it is important for you to understand this number and how to improve it.

If you have loans of any kind in your name (personal loans, student loans, car loans, credit cards, etc.) then you have a credit file with one or more of the major credit bureaus – TransUnion, Equifax and Experian.

This file contains information about how you have repaid your loans. For each loan they show if you paid on-time or if you paid late each month (30, 60 or 90+ days late). It also shows how much of each trade line you are using (i.e. you have a credit card with a $1000 limit and you are carrying a balance of $400). If you have had more serious money problems it shows that as well – bankruptcy, accounts that have gone to collections, and unpaid liens. Finally it shows how many times you have authorized financial institutions to access your credit report (also called inquiries).

Your credit score is based off information in your credit report. Your score ranges from 300-850 (higher is better). The following graph shows how your credit score is determined:

FICO score

Payment History (35%): Because this is the biggest piece of your credit score you should definitely pay attention to it. If you pay late, declare bankruptcy or have a bill go to collections you are going to see your score drop. Paying your bills on time (even if you have had problems in the past) will increase your score.

Amounts Owed (30%): This category is sometimes called your capacity – or how much open credit you have on your revolving credit lines (typically credit cards). If you have three credit cards with a total credit limit of $2500, and you carry a monthly balance of $1000, you are using 40% of your available credit. The lower that percentage, the better.

Length of Credit History (15%): This category takes into account both your oldest reporting trade line and the average age of all your accounts. Only time can improve this section, but closing old credit cards can harm your score in this section, so unless you are paying an annual fee on a card you aren’t using anymore, keep those old accounts open.

New Credit (10%): The biggest part of this is inquiries. If you are credit active (apply for a lot of credit) you are going to see a drop in your score.

Types of Credit Used (10%): Lenders like to see that you can handle a variety of loans – credit cards, student loans, car payments, a mortgage, etc.

This short video will review all five areas:

Tips for Increasing Your Credit Score

  • Pay your bills on time
  • If you need to be late, don’t hit the 30 day late mark
  • Decrease the balance carried on credit cards and/or increase your credit limit
  • Don’t close old credit accounts
  • If you are rate-shopping (which is a good idea), rate shop in a 45-day window. As long as you are applying for the same time of loan at each place (i.e. a car loan) it will only count as one inquiry
  • Check your credit report regularly (annualcreditreport.com) and fix any errors
  • Build credit in your own name

How to Find out Your Credit Score

Unfortunately you can’t get your credit score for free through the credit bureaus. However, if you plan to apply for a loan or are applying for jobs or an apartment, it is worthwhile to pay to find out your score ahead of time.

Your banker will often pull your report for you (it will count as an inquiry on your report) but you can also purchase it directly from www.MyFico.com.  There are other places (www.CreditKarma.com and www.CreditSesame.com, for example) that offer you free credit score monitoring services and are supported by ads.

In conclusion – you know your blood pressure, your golf handicap and other important numbers, but if you aren’t familiar with your credit score yet it’s time to get to know that number.

Small Business Taxes

taxes for small businessFor those of us who run a small business almost nothing causes more challenges and stress than tax time.

Today’s post is meant for those of you running, or thinking about running, a small business, and how you can make tax-time easier.

I want to establish up-front that I am not a tax accountant or tax lawyer, nor do I play one on TV.

My wife and I do, however, run three home-based businesses and I have filed my own taxes for years. My wife runs a business called Hair Springs and I have an insurance business and maintain and host a few websites for some friends.

The key to doing your taxes is to KEEP GOOD RECORDS!

What should I do in order to maintain good records?

There are four steps to maintaining good records in order to make tax time easier.

Step One: Open a checking account that you only use for your business. Get checks and a debit card.

Step Two: Download business accounting software. For a long time, QuickBooks was the only player in this market, and for years they offered a free version for those running home-based businesses. This ended a few years ago, though, and the cheapest version is now $10 a month. QuickBooks holds over 90% of the market, and is a great choice for many businesses.

If you have less than 9 employees, though, you should check out WAVE, which is free. You can find it here: https://www.waveapps.com/accounting/.

Step Three: Make all purchases and pay all expenses with your business account, and make all deposits from sales into this account.

Step Four: Get a receipt for EVERYTHING, and anytime you make a sale print up a receipt. Enter all sales and expenses into your accounting software.

If you plan to use a professional tax preparer, that is pretty much all you need to do. This person can handle all the accounting details for your company and they will file your return and other taxes for you.

The IRS has a post that discusses in detail what type of records you should keep. You can find that here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/What-kind-of-records-should-I-keep

How do I figure out how much I need to pay in taxes?

Most home-based businesses will file an annual tax return and you will do so with your regular tax return. Your business income and expenses will be entered on Schedule C, then your profit or loss is  transferred to Form 1040.

You are going to either have a business loss or profit. If you have a profit (which is the point of having a business) you are going to pay self-employment tax of 15.3% plus income tax. To figure out if you have a profit or loss you deduct all business expenses from your business income. If the number is still positive, you have a profit. If the number is negative, you have a loss.

A profit gets added to your income and a loss can actually lower your income, meaning that you will owe less in taxes.

NOTE: The IRS understands that you may have a loss for a year or two when starting up, and occasionally you may have a bad year. The point of having a business, though, is to make a profit. If you don’t make a profit at least 3 out of every 5 years the IRS will classify your business as a hobby, which means that losses are only deductible up to the amount of profits, and you may have to pay back the taxes you avoided by taking a loss.

15.3% plus income taxes can add up to a big number. Many experts recommend setting aside 25-30% of your income for taxes. I think this is wise advice!

Do I have to pay quarterly taxes?

When you are an employee your employer withholds part of your check and sends it to Uncle Sam. As a self-employed individual, though, no one is withholding anything. The government wants their money regularly, so you may have to pay quarterly taxes.

If you are in your first year running a small business, you don’t need to pay quarterly taxes. After year one, though, you may need to pay quarterly taxes if:

  • You paid more than $1,000 in taxes the previous year
  • You expect to pay more than $1,000 in taxes this year

If you paid no income tax last year you probably don’t need to pay quarterly taxes this year. It still can’t hurt to set some aside for later taxes, though.

A rule of thumb is that is you are going to make more than $15,000 in your business you probably need to pay quarterly taxes. I personally feel that it can’t hurt you to pay quarterly taxes, regardless of how much you are going to make.

To determine how much you should pay, get last year’s tax return and find how much tax you paid (Line 78 of Form 1040). Multiply that amount by .90. If you paid $10,000 in taxes last year you would get $9,000. Divide that number by four ($9,000/4 = $2,250). This is the amount you should pay each quarter.

You pay estimated taxes on Form 1040-ES.

If business slows down (or you do better than expected) you can adjust the amount you are paying.

Quarterly taxes are due April 15, June 15, September 15 and January 15.

As you can see, filing taxes can be quite complex. There are a number of other things to consider as well, such as:

  • What type of business structure to use (sole proprietorship, LLC, etc.)
  • If you are going to keep working full-time or part-time at another job, and how withholding there will affect your business taxes
  • How much of a deduction you can take as a home-office deduction

If you run a very small business you might be able to do this all yourself, but for many people you should strongly consider hiring a tax professional to help you maintain your books throughout the year and file your tax return. Tax professionals understand the tax code and are likely to find deductions you may miss.

You still need to maintain great records, and you should know exactly what your tax professional is doing and why they are doing it. Make sure they take the time to educate you.

Professional tax preparer

Even though I don’t mind filing my own taxes, my business income is getting complicated enough that it’s probably time for me to consider hiring someone to do my taxes for me. A good tax professional is worth their fee.

For additional tax help for your small business, the IRS actually has a helpful page: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center.

To conclude, I want to stress again the vital importance of maintaining good records. Nothing will make tax time more difficult than incomplete or inaccurate records. Set up a separate account, download business accounting software and enter all income and expenses into the software.

Making tax season a little less taxing

taxesby Ryan H. Law

Politicians love to talk about how long the tax code is and compare it to how long the Bible is. I found quotes of politicians who said it ranged anywhere from 2,500 pages to 1.3 million pages.

It’s actually 13,458 pages (and growing every year), and if you want to order a copy of it you can purchase all twenty volumes of the code and regulations for just $10 for your Kindle device!(1) What a bargain!

In what has to be one of the greatest marketing strategies of all time, the U.S. Government Publishing Office, where you can order a printed copy of the tax code, encourages you to “Cozy up with a book from our latest Catalog,” or in the case of the tax code, cozy up with 20 books. Happy reading!

winter catalog

 

 

 

 

 

Here’s answers to common questions to help make tax season, well, a little less taxing.

Q. How early can I file my taxes?

A. Wait to file your taxes until you have ALL your tax forms. This includes W-2s, 1099s, Interest statements, etc. Employers and companies have until February 2 to send you everything, so you should have everything shortly after that. Make a list of what you should receive and wait to start until you have it. The most common forms are:

  • Form W-2: You should receive one from each of your employers

  • Form 1098: If you paid interest on a home or student loan or paid college tuition you will receive a 1098

  • Form 1099-DIV: If you received dividends, distributions or capital gains on any investments, watch for one of these to grace your mailbox

  • Form 1099-INT: Any interest paid to you, such as interest on a CD or bank account, will be reported on this form. If you get a pink one of these, you actually win $1,000(2)

  • 1099-MISC: If you did work as an independent contractor you’ll get one of these.

  • If you donated to a charity they will either provide you a receipt when you donated, or an end of year statement

There’s other forms as well, but those are some of the most common ones.

Here’s a great printable checklist from TurboTax:

http://images.turbotax.intuit.com/iqcms/marketing/lib/TurboTax_TaxPrepChecklist.pdf

Q. Should I file my own taxes or have someone do it for me?

A. There’s a few different ways you can file your taxes:

  • On paper
    I don’t recommend this – calculations can be complicated.

  • Software such as TaxAct, TurboTax or H&R Block at home
    Most of the top-rated software packages are simple and intuitive to use, and they are made for consumers (not accountants). You’ll enter your tax forms in and the software will do the calculations, search for possible errors, and file your taxes electronically. I personally use TaxAct.

  • Discount tax preparation services, such as H&R Block or Jackson-Hewitt
    These companies have their place, but can be expensive for what they provide. Their tax preparers are trained, but use similar software that you can use on your own. If you want the peace of mind from having someone do your taxes, this can be a good option.

  • Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE)
    VITA and TCE volunteers are IVITA TCERS-certified and will file your taxes for free. You read that correct. It’s free, and there’s no catch. VITA is available for anyone that makes under $54,000, and TCE is available for those over age 60. You can find them here: https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers. Both VITA and TCE tend to fill up quickly, and many are first-come, first-served.

  • Accountant or CPA
    Unless you run a business you probably don’t need an accountant or CPA to prepare your return. I have several small businesses, and we still file our own, but if your business starts to grow you should work with your accountant or CPA throughout the year.

Q. What is the due date to file my tax return?

A. It’s normally April 15, but this year it is Monday, April 18. Why? Basically it’s because Washington DC has a holiday (Emancipation Day) on Saturday, April 16, and by law when that holiday falls on Saturday or Sunday it is observed the Friday before. A federal holiday on Friday, April 15 means that tax day gets moved to the following Monday.

To close up this week’s article, I strongly encourage you to check out one of the VITA sites if you make less than $54,000 a year. Most people who uses a discount tax preparer could have their taxes filed for free instead.

One last note – don’t ever get a Tax Refund Anticipation Loan. Companies will offer to give you your tax refund right then, for a fee that ranges between $30 and $150. Don’t fall for it – if you file electronically you’ll have your refund in 1-2 weeks.

(1) http://www.amazon.com/Complete-Internal-Revenue-Federal-Regulations-ebook/dp/B006KS43L8/ref=sr_1_2?ie=UTF8&qid=1453835893&sr=8-2&keywords=irs+code+26

(2) Just kidding.