Budgeting

Just When I Thought I Was So Smart . . .

As a professional, it’s always wise to project a good image of yourself, especially that you are intelligent. However, sometimes or many times we do things that really humble us and hopefully help us to not be so prideful. Here are a few things that I have done recently and not so recently:

GPS: My GPS on my phone showed that it would take about 2 hours to get back home, which I thought was due to traffic and was normal, even though I was about 35 minutes away. For some reason the GPS kept on taking me through side streets with lights, which seemed to appear every 200 feet. Finally, after about 20 minutes I pulled over and took a good look at the directions and realized that I was taking the bike route. Yes, it took me 20 minutes to pull over.  I think that my pride ran away at that moment.

App and phone purchases: If you know anything about children and video games then you know that you can make in-app purchases within the games to obtain more virtual money, coins, or gems. There weren’t the proper safeguards in place on their tablets and in a blink a lot purchases were made. A lot of purchases were made. Did I mention that a lot of purchases were made? We were able to get some refunds, but let’s just say that where this is a will there is a way, especially when your children then ask if they can borrow your phone and decide to go on a shopping spree at Amazon. I really don’t need a PS4.

Per diem: When I started my practice years ago during the recession it took time to acquire clients, which is normal and expected. In the meantime I could have worked per diem at another firm at least for that first year or so. However, I had such a bad experience with the previous firm that I worked for as an employee that I told myself I would never again work for anyone else. The extra cash made working per diem would have been nice and would have made the transition from employee to practitioner easier and less stressful financially.  Eventually, I did work per diem after about a year or so at a few different firms, and I met some really good people.

There are many more that I’ll keep to myself, but we all need to be humbled from time to time.

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This Will Kill the Economy Long-Term

There are many factors that can help an economy to grow, including productivity gains, wage growth, sound governmental policies, healthy banking systems, etc. A lack of all of these items will hurt economic growth, and there is one more often overlooked item that can and will devastate an economy over the long haul.

It’s probably not what you think, but I’ll give you a hint: think Japan. What is a major issue that is facing Japan? Low birth rates and a disproportionate amount of older persons compared to younger persons. Why does this matter?

Minimum: Statistically, a country needs approximately 2.1 births to have a stable population. If you want to bury yourself in statistics, then you can read reports from the U.N. or The World Bank. Although there are lower mortality rates than in the past, fewer births will mean a declining population and a disproportionate amount of older persons. By the way, the world’s population is expected to stabilize and/or decline by the end of this century.

Disproportion of elderly: In Japan, the population of elderly persons is much higher than in the U.S. Unfortunately, with lower birth rates there are less younger people able to physically take care of the elderly and also financially. Systems like social security will not be able to continue in a healthy fashion if there are not enough younger people available to contribute towards the system.

Basic math: If there are less people available to purchase services and products then economic growth will stagnate or decline. This can be offset somewhat by productivity gains and wage increases to an extent. Also, there will not be enough candidates to fill employment opportunities at businesses, which will stifle growth further.  More people = growing economy.

Myths?: I believe it started back in the 1960’s with doomsday scenarios of overpopulation and a strain on the resources of the planet. It really hasn’t panned out, but there have also been other modern inventions and policies that have stifled population growth. There is one statistic that I’ve heard that states the entire world’s population can fit in the State of Texas comfortably. Even if this statistic is way off and it would take the entire United States, then that would leave the rest of the world wide open.

Solutions: There are a few solutions to address this problem. One is immigration from countries or regions with high birth rates, such as Africa to countries with low birth rates, such as Japan. This would take changes to immigration policies enacted by governments.  The other solution is to encourage families to have more children and not to wait too long to do so. What is the worst that can happen – you may need to buy a massive van to drive your family around?!

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Want a Better Business? Focus on Recurring Revenues!

There are more ways to make money in business that can be listed. However, one mostly overlooked business model by a majority of small businesses is the recurring revenue model. Larger businesses already know this and are taking advantage of the benefits. Here are some pros and cons and how to implement the recurring business model:

Pros: Recurring revenues, specifically monthly recurring revenues, provide a steady stream of predictable cash flow. Since you can easily predict your income you can plan ahead for the amount of expenses needed to support your revenues, such as employees, technology, supplies, inventory, etc. This will in turn significantly lower your expenses and help to increase your profit margin. Additionally, a business with recurring revenues has a much higher value than one-shot deals. Think homebuilder (one-shot) vs. a subscription service like Netflix (monthly revenues).

Cons: Many small business owners love the large payments that they receive when they land a one-time or short-term project, which do not exist with the recurring revenue model for the most part. It can take time to build a recurring revenue business, but an existing business should realistically be able to see a massive change with a one year period.

How to Implement: Take a look at the services and/or products that you provide, and determine which ones can be modified to fit the recurring revenue model. For example, a marketing company that helps clients with social media can develop a package to perform certain tasks each month in exchange for a recurring monthly fee.  Virtually any business can turn at least a portion of their business into recurring revenues

The recurring business model is not costly or difficult to implement, but rather a low-risk, high-reward activity. It takes courage and openness to change your business, but it will be worth it.

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Who Will Come Out Ahead When Filing Their Returns This Season?

Who will benefit the most from the tax law changes this year? The biggest winners will be:

Corporations: With reduced corporate tax rates of 21% versus the previous 35%, most corporations will come out ahead. Although corporations that have income of less than approximately $75,000 may not benefit.

Business owners: Business owners that operate sole-proprietorships, s-corporations, and partnerships that will benefit from the section 199A deduction, which generally is a deduction of 20% of your business income. However, there are limitations based upon the type of business such as healthcare providers, wages paid, income, etc.

Large families: With a child tax credit of $2,000 per child, families with many children will benefit from this credit. However, there are no exemptions this year which offset the benefit of the credit, and there is a phase-out of the credit if your income is greater than $200,000 or $400,000 if filing jointly.

Higher income households: Since the tax brackets have all been lowered and mostly expanded as your income increases, then the more money you make the more you will benefit. The highest individual tax bracket is 37% versus a high of 39.6% previously.

On second thought, who will be available to process all of the returns at the IRS?

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Paid Sick Leave in NJ? What You Need to Know

Another change in New Jersey that affects both employers and employees in the state is paid sick leave, which was effective starting October 29, 2018. Here are the details:

Number of sick days: The New Jersey Earned Sick Leave Law allows employees to accrue 1 hour of sick leave for every 30 hours worked, up to a maximum of 40 hours each year. An employee is eligible to use the earned sick days beginning 120 days after commencing employment.

Permitted usage of sick leave: Sick days can be used for diagnosis, care, treatment or recovery from an employee’s mental or physical illness or for the needs of a family member. The time can even be used by an employee in connection with their child to attend a school-related conference, meeting, or function.

Alternatives: An employer is in compliance if they offer paid time off, including personal days, vacation days, etc. that can be used as sick days, as long as they are accrued at the same or greater rate.

Carry forward: The employer shall not be required to permit the employee to accrue or use in any benefit year, or carry forward from one benefit year to the next, more than 40 hours of earned sick leave.

The interesting aspect of this law is that as an employee-owner, you have to include yourself. When do owners take a sick day?!

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Are there Alternatives to Traditional Health Insurance?

My last post titled, “Did You Know that NJ Now Requires All Residents to Have Health Insurance?” gave a few exceptions to the new New Jersey mandate that requires all New Jersey residents to have health insurance. One of the exceptions to the mandate is health care cost sharing, which almost no one has ever heard of. It may be a good fit for you or maybe not, but here are some details regarding health care cost sharing to help you decide.

Examples of health care cost sharing ministries: Solidarity Healthshare (my family and I are currently members), United Refuah, and Christian Healthcare Ministries

What is health care cost sharing: This is taken from Solidarity Healthshare’s website https://www.solidarityhealthshare.org/ :

“Health care sharing ministries provide a way to pay for health care costs that is different than traditional health insurance.

As a member of a health sharing ministry, you pay a Monthly Share Amount. This monthly share is then used to pay for the health care needs of other members. When you have a health care need and if you have met your Annual Unshared Amount, other members will pay for your health care needs.

Members also agree to a common set of beliefs that help determine which medical costs the community will share towards. With Solidarity HealthShare, guidelines on the medical expenses that members share towards are primarily guided by the moral teachings of the Catholic Church. These beliefs help define what is and is not eligible for sharing.”

What is the cost: For Solidarity, the monthly cost to join ranges from $149 for a single person under 30 years of age to $449 for a family under age 65. The amount that each member is responsible for before their costs are eligible for sharing is between $500 for a single person to $1,500 for a family. Each health care cost sharing ministry encourages and supports healthy behaviors and lifestyles and encourages you to be in charge of your own health care. This is what enables the ministries to be so cost effective.

What’s covered/not covered: All three healthcare sharing ministries seem to be very transparent about what expenses they cover and do not cover. Their websites list medical expenses that are covered, which is very comprehensive.  Items that are generally not covered are:  pre-existing conditions may be limited, dental, vision, and other expenses that are outlined as not eligible for sharing. Each health care cost sharing ministry has difference guidelines.

Caveats: Unfortunately, the cost of your monthly membership is not tax deductible. Additionally, you want to make sure that you thoroughly review what is covered and what is not covered according your situation and needs. Also, it seems that health care cost sharing makes most sense for individuals that are not covered with health insurance by their employers, such as self-employed individuals.

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Did You Know that NJ Now Requires All Residents to Have Health Insurance?

Starting this year, New Jersey is requiring all residents to have health insurance. Even though the Federal government has gone in the opposite direction, there are a handful of states that have their own mandates or are considering a mandate. What are some of the requirements, exceptions, and penalties regarding this new law?

Requirements: The law requires you to have minimum essential health coverage or qualify for an exemption of coverage. If you do not have coverage or qualify for an exemption, then you will incur a shared responsibility payment when you file your 2019 New Jersey tax return next year.

Exceptions: There is a whole list of exemptions, and some of them are as follows: income related, such as marketplace affordability and income below filing thresholds, gaps in coverage of less than two consecutive months, hardships, and group memberships, such as being a part of a health care sharing ministry.

Penalties: The minimum penalty is the greater of 2.5% of your household income or $695 for an individual taxpayer. This increases to a maximum of $15,060 for a family of two adults and three dependents with a household income greater than $400,001.

The penalties are steep so make sure that you are properly covered or are able to receive an exception to the penalties. For those who are looking for non-traditional coverage options, health care sharing ministries such as Solidarity HealthShare or Christian Healthcare Ministries may prove to be good, low-cost options. However, make sure to perform your due diligence to make sure that these can be the right fit for you.

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Small Business, Large Profits

All small business owners want to increase sales, open new locations, obtain more customers, add employees and grow, grow, and grow some more. It sounds good, but is it really necessary? Is there an alternative?

Necessity: It is necessary to grow your business as the alternative isn’t too appealing. You have financial obligations and people that depend upon you, such as family, employees, and customers. So, yes, it is necessary, however, here is a different view on growth.

Focus on profitability: If you double your profit margin then this has the same impact as doubling the sales of your business. Even if you increase the profit margin by several percentage points then it has the same impact as increasing sales. It sounds too easy, but here are some ways to do this:

  1. Decrease the number of services/products. Spreading yourself too thin usually decreases your profitability because it is hard to do everything well.
  2. Service the proper clients by targeting a more defined niche.
  3. Use marketing methods that only target the customers that you want to serve.
  4. Plan ahead for large purchases or investments, including space requirements, people, vendors, equipment, and technology.
  5. Price your products and services properly.

The interesting fact is that when you are more profitable, then each additional dollar of business is worth more to you, which makes it easier to actually grow further.

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Be Careful When Making Online Payments to the IRS

We usually recommend that taxpayers make their tax payments online to the IRS and states. Here are the benefits, but a few caveats to watch out for:

Benefits: When making payments online, your payments are generally credited on the day that you make the payment. Additionally, you can clearly apply your payments to a prior tax year, current tax year, or for estimated tax payments. This helps to minimize errors when the IRS receives your payments, such as applying them to the wrong tax year and the date the payment was made.

Beware of these issues: Recently, we discovered that it is imperative to use the primary taxpayer’s social security number when making payments online to the IRS, otherwise your payment may sit in limbo and not be applied to your account. Other tips include:

  1. Make sure that you specify the correct year that a payment should be applied to.
  2. Double-check your banking or credit card information to ensure that your payment actually gets processed.
  3. Save the confirmation that you paid your taxes as a pdf document or print it out

Overall, we have seen a much lower number of issues when clients make their payments online. Just make sure to adhere to the tips above.

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Is It Better to Pay Off Debts or Invest?

Almost everyone has some sort of debt and economic data shows that this is the case. Between mortgages, student loans, credit cards, business debts, and auto loans and leases (yes, a car lease is debt), many people find themselves allocating large portions of their income towards debt payments. When you are in a position to start paying off debts, should you do so or invest your extra funds? Let’s take a look at the pros and cons of each.

Pay off debts: Pros: Paying off debts with your extra cash will help you to decrease your liabilities, save interest, which can be significant with credit card debts and some business loans, and eventually enable you to free up cash flow. A non-conventional way to pay off debts is to start with the smallest balance debt to get the momentum going.  Cons: If you focus solely on paying off debts while ignoring investing then you will have no assets for long-term or short-term needs. If a short-term emergency arises, then you will be forced to incur debt to pay for it.

Invest your extra funds: Pros: Investing and savings will hopefully produce a much larger amount of assets over time and enable you to take care of emergencies that arise. Keep in mind that funds for emergencies should be kept very liquid, and a reasonable amount to set aside should be 3 to 6 months of expenses. Cons: Your liabilities will decrease slowly, interest expense will remain high, and you most likely will earn less on your investments especially when factoring in risk, then if you were to pay off debts.

Alternative: The decision to pay off debts or invest does not have to be an either or. Some well-known experts advocate at both ends of the spectrum. Why not do both? Assess your debts and savings to see where you will get the most bang for your buck. For example, let’s say you are able to allocate 6% of your income to savings or investments, then you can use 2% to pay off high interest debts, 2% to save for short term needs, and the remaining 2% can be used to save for retirement.

What if you don’t have extra funds?: The solution is simple, but not easy. Assess your lifestyle to see where you can cut expenses while working to increase your income. If you spend everything that you make currently and work to increase your income by 3% and decrease your expenses by 3% then you will now have extra funds. If your situation is more extreme, such as expenses that are higher than your income, then you will have to take stronger action. For smart ways to cut expenses, then type “expenses” in the search function of this blog.

The mature approach: If you have large excess funds then don’t incur more debts and pay off existing debts quicker once your savings rates are much greater than needed. You can be the only one on your block that doesn’t have debt and no one has to know. I am sure that the quality of your sleep will improve!

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