College

5 Financial Truths

There is a lot of information out there about finances, and it’s hard to figure out what is exactly true or not true. Always seek the truth, especially from someone that is not trying to sell you something. Here are some examples:

College: We are led to believe that all of our children must go to college to be successful and make a lot of money. While I am a big believer in education and college, it is not the only route and it is not for everybody. With the high cost of college, the decision to attend college should not be automatic. There are alternatives, such as becoming a tradesman, learning a special skill that does not require college, starting a business, sales positions, military or government positions that do not require college, stay at home parent (yes, this is a vocation), etc.

Retirement savings: Saving for retirement is a good thing, however, it should be balanced with both short and mid-range needs. For example, if you allocate virtually all of your savings towards retirement accounts and ignore having a cash cushion, then your risk of financial catastrophe increases. If a financial crisis arises or a large purchase needs to be made, then you will have to withdraw from your retirement accounts, which is one of the worst financial decisions to make due to both income taxes and penalties on the withdrawals. Furthermore, if you do not have withholdings taken from your distributions, then you will probably end up with a tax problem once you file your return. The prudent action is to have a cash cushion of 3 to 6 months of expenses for emergencies and to save for mid-range goals, such as a house purchase.

Debts: Debt truly is a double-edged sword. There are some who advocate staying away from debts at all costs and others who encourage you to leverage yourself to make more money. The truth is that debt should be used wisely and sparingly, if necessary and as a last resort, and it should not cripple you. If you are able to avoid debt, then that is excellent, as debts increase your risk and they also encourage risky behavior and increased spending in many cases.  To prove this point, why do you think McDonald’s started to accept credit cards, why do auto loans have 7 year terms, and why can young adults take out massive loans for college?  It is to get you to spend more than you would have otherwise.  As you mature financially you should seek to decrease your debts.

Most people would not be able to afford a house without obtaining a mortgage, and if they waited to purchase a house and rented instead, then they would most likely be worse off financially over the long term. Also, some businesses may need to incur debts to purchase expensive equipment, inventory, or improvements that would not be possible if they did not incur debts. To emphasize, it should be used wisely and sparingly.

Expenses, income and savings: Most likely your expenses are way too high. If you are able to save 15- 20% of your income and have no debts then spend whatever you want. Otherwise, set aside money towards savings to steadily increase the percentage that you save each time you get paid. This way you will spend whatever is left over. If you are not able to do this then you need to take a serious look at decreasing your expenses and increasing your income. The truth is that it is really not that hard, but most people have a hard time doing this. As Yogi Berra said, “Baseball is ninety percent mental. The other half is physical.”

Home and health = wealth: In the quest for success, don’t ignore your most valued relationships or your health. Nothing can cripple your finances as quickly as health or family issues, such as divorce. With either of these issues your expenses increase exponentially while your income suffers at the same time. Make sure to prioritize.

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Where Are all of the Young CPA’s and Why Should You Care?

I was at another continuing professional education seminar recently, which is very often as CPA’s are required to have 120 hours of continuing education every three years. One of the observations that I make each and every time is that I am one of the youngest CPA’s in the entire room. This is true now and was true 10 plus years ago when I became a CPA. Unfortunately, I have been jumped past the young man status, so it has nothing to do with being a “young” CPA. Why does this matter and why should you care?

Some details: When looking around the room this time and every time, It appears that approximately 5% of the CPA’s are younger than 50 years old, with the majority being older than 60. Could it be that older CPA’s attend the seminars that I happen to attend or is this true throughout the profession. When digging deeper, I found out that according to the AICPA, approximately 75% of CPA’s are expected to retire in the next 15 years, so my observation applies throughout the entire profession, and not just Bergen County.

More accountants, less CPA’s and CPA firms: Studies are showing that although there are more accounting graduates, less are becoming CPA’s. There are numerous reasons why including greater education requirements, time requirements, and the expense of taking and studying for the exam. Also, although I do not have a statistic on the age of CPA’s that own small firms, I do not know, even casually, one CPA firm owner that is younger than me. Just to reiterate, I am not a spring chicken anymore.

Negative impact on clients: CPA’s are the main business and tax advisors to small business owners and many individuals, so who will fill this void? I can only make several guesses to the alternatives, which are not very good for clients. Alternatives include: using non-CPA business advisors and preparers (whom generally lack the education, expertise, and training of CPA’s), using larger firms (along with much higher prices and less attention to the “little” guys), and doing everything yourself (ie. QuickBooks, however you need to be an accountant to actually get the numbers correct, along with not receiving guidance that saves business owners more than they actually pay their CPA). Another negative aspect is that there will be less CPA’s to collaborate with as peers. As a side note, the CPA’s that I know have been the most generous, helpful, and supportive people to me professionally.

General trends: There has been a generally trend for less people to start their own businesses, which has been the case for decades, according to a 2017 report by the Kauffman Foundation, titled, “The Entrepreneurship Deficit.” Several reasons are cited, including demographic changes, technology, and geographic changes. It appears that the CPA profession is not immune to these general trends, and as a result there are less small CPA firm owners.

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Cost of College = $1,000,000?

If it costs approximately $30,000 per year to attend college, although that figure can be much higher, then the cost of college for my children will be over $1,000,000 when the time comes, especially as rates keep on rising. In case you are wondering about the math, here it is:

7 children times $120,000 (for 4 years) = $840,000. Multiply that by an average annual tuition increase of 3% over the next 7+ years and the cost is over a million dollars.

When I get asked the question, “How are you going to send your children to college?” I usually reply with a snide remark that I am going to discourage them from attending college. However, there is some truth in that, and here are some alternatives from paying high tuition that we have discussed with our children:

Military: One of my sons wants to be in the Army. This is extremely noble and brave and not for everyone. If he stills wants to be in the Army when he comes of age, then he can also apply to and hopefully get accepted to West Point to accelerate his military career. There is no tuition at West Point.

Entrepreneur: I’m very biased with this one because I work with entrepreneurs all day long. Aside from certain professionals, such as doctors, attorneys, CPA’s, etc., you usually do not need to go to college to start your own business. Some do very well and some don’t, but I would hope that they would receive my guidance to help them to succeed.

Nursing: There are many good local colleges to choose from, which will eliminate the cost of room and board. This will dramatically reduce the cost.

Famous: Who says you can’t get paid to be famous?

Mom: My older daughters say that they want to be moms. Although it is not in vogue to be a stay at home mom nowadays, I believe that it is one of the greatest gifts that can be given to your children.

YouTuber/Gamer: I’m not sure what this one means exactly, but I think that it means recording yourself playing video games while narrating what is going on. Although, I am not sure if you can make a living wage from this or for how long, but if so, then great.

My children are not even teenagers yet, so let’s see what happens. I am definitely keeping an open mind and not taking this too seriously at this point!

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Say “Hi” to Your Customers

When I was in college I worked at the now defunct supermarket chain, Grand Union, as a cashier. I really didn’t want to work there at first, but working there helped to pay for all of my expenses while attending college. Thinking way back, I remember that when customers came in line I usually didn’t even look at them or say “Hi” until one day after talking with my dad.

I must have been complaining about dealing with customers when he asked me one simple question.

“Do you say “Hi”i to your customers,” he asked.

“No,” I answered, thinking why should I?

“Why don’t you start saying “Hi” to your customers from now on,” he commanded.

Surprisingly, I actually listened to my dad even though I knew best as a teenager, and it transformed my work experience immediately. Instead of having disgruntled customers, they now seemed to be transformed into casual friends. It was amazing that one word changed both my experience and that of my customers.

Why was this so effective and powerful? I can only make a couple of assumptions as I’m not a psychologist, but this is what I think:

  1. It created a dialogue between the customer and myself
  2. I was viewed as a person, rather than some mindless cashier, or worse
  3. Usually people are nice to people who are nice to them
  4. Lastly, people want to be recognized, even in the smallest of ways

Were people nice each and every time? No, but it was rare that I had a bad experience with a customer from then on. Don’t forget to say “Hi” to your customers, or your local cashier. Who knows, one day they become your CPA!

Don’t Worry if the Timing is Not Right to Conquer the World

Ever feel frustrated that your business or your career isn’t going as well as it should? I’m sure that most people feel like this from time to time, but sometimes there are valid reasons for this. Not excuses, as the “success” coaches may call them, but as human beings we have many moving parts to our lives. Some reasons for not being able to conquer the world right now and what to do include the following:

Health Issues (Physical & Mental): They may come at any time and can be minor, permanent, or severe. Health issues can put you out of work for months or even years. The main objective should be to focus on getting your health back so that you can take care of yourself and your family. Next, you should look into how future health problems may be prevented, if possible. You may also find that you have to attend to family members that get sick, such as spouses, children, and aging parents. First things first.

Raising Children: Raising children is not an easy task and many parents feel the tug between working and taking care of their children, especially mothers. This is especially true when both parents work, which is the majority of parents nowadays. I’ve written about the trap when both parents work full-time as the financial benefit is not usually as great as it seems when factoring in taxes, additional expenses, etc. Some options to help juggle responsibilities are to change your work schedule, have a flexible schedule, or work part-time, especially during school hours.

Addictions: Addictions can be in the form of alcohol, drugs, pornography, and gambling to name the major ones. No one likes to talk about this because of the stigma of addictions, but these will have a devastating impact of your business or career, even if you are indirectly impacted by addictions, such as with a child or spouse. Healing and overcoming addictions needs to take place.

Family Issues: Divorce or separation is a common family issue and may go hand in hand with the other examples above. Marriage struggles, especially divorce, will not only impact you and your children emotionally and spiritually, they tend to destroy family finances. Who care if they are successful if their family is torn apart? Marriage therapy, family therapy, or spiritual guidance from a priest or minister can help to save your marriage. Also, all kidding aside, they are much less expensive then a divorce attorney.

We are not machines, but people that have problems, emotions, and are all fighting our own battles. Some battles are greater than others, but we must build a solid foundation before conquering the world.

Are Children Really That Expensive?

Virtually every financial article regarding children makes you think that you will go broke if you have children. Between childcare, housing, food, diapers, vacations, clothing, activities, and especially college, they make it seem that you can’t afford to even think about children. The truth is that raising children is as expensive as you make it. Let me dispel some myths . . .

Housing: If you have a three bedroom house and have three children then one of them will have to share a bedroom. The good news is that the two that share a bedroom will not be scarred for life, but they may actually enjoy the company of each other and learn to work together.

College: I am a very, very strong believer in education, especially higher education. However, as I have written before, college is only one route to [financial] success and is not for everyone. There are alternatives, such as attending a trade school, jobs that don’t require college, entrepreneurship, or you may actually want to be a stay at home parent. Just look around you and see for yourself that some of your friends, colleagues and family members have taken a different route and are doing well for themselves.

Vacations: Vacations don’t have to be expensive and Disney is not the only option. Strangely, if you have ever travelled by car for vacation and stopped at a hotel on the way it seems as though the children enjoy the hotel visit more then the vacation! A more expensive vacation does not equal more fun and relaxation.

Food: I’ve written how to reduce your food costs before so I won’t elaborate here. Food can be as expensive as you want it to be.

Everything Else: Expensive private schools or preschools, an abundance of activities, and unnecessary purchases will make raising children very expensive. Also, when both spouses work while the children are very young it usually skyrockets your expenses (see my November 2015 blog article titled, “Should Both Parents Work?”).

Don’t misunderstand me – it is good to have nice things, but not when the “need” for those nice things steers you in the wrong direction. Children are a blessing. All seven of mine.

If You Want More Success Then Know the Difference Between Important vs Urgent

Important vs. urgent. Many people confuse the two, but if you want to be more successful, then you need to be able to discern between them. Important items have great significance or value while urgent items require our attention immediately. Here are some examples:

Important:  These are items that you need to do, but do not have to be done today, such as projects and assignments, planning, exercising, learning/training, saving for the future, etc.

Urgent: These usually have to do with grabbing your attention immediately, such as text messages, social media, doing dishes (our spouses may disagree with this one), interruptions, emails, most telephone calls, etc.

The problem arises when the urgent items seem to be important because they are pulling at us, and then we ignore all of the important items that we should have done. This is probably why many people say that they didn’t get anything done because their attention was diverted to urgent items. Even worse is when we procrastinate and make the important items both important and urgent.

What are some solutions? If an item is important, then you should set aside time either daily, weekly, or monthly to take care of it and actually put it on your calendar. Once an important item is scheduled there is a high probability it will get done. As for the urgent items, you can schedule these as well to take care of them at specified times or on a specific day. If you want to be bold then try this experiment for one week or even one month: shut off all of your alerts, emails, etc. while you are working, and designate a time to check them, say twice a day. Then, see if your productivity improves, and let me know what happens.

Is it Better if I File Separately from My Spouse and Other Common Tax Questions Answered

We receive a lot of questions pertaining to tax and financial matters. Here is a sample of commonly asked questions:

Q: Is it better if I file separately from my spouse?

A: Usually the answer is no, and the only way to know for certain is to perform an analysis when preparing the tax return to split income and deductions between spouses to see if there is a benefit. However, you may want to file separately from your spouse if there are tax or legal issues.

Q: Is social security taxable?

A: That depends. If you are only receiving social security and do not have other income, then the answer will probably be no. A quick way of checking is to add one half of your social security plus your other income to see if it is greater than your base amount, which varies based upon your filing status (currently it is $32,000 for married filers).

Q: Does my son or daughter need to file a tax return?

A: Generally, if your dependent child has more than $6,300 of earned income or $1,050 of unearned income, such as from dividends, then they need to file a return.

Q: If I file an extension, will it extend the amount of time that I have to pay my taxes.

A: No, the extension only grants you additional time to file your return and all payments must be made by the original due date, otherwise additional interest and penalties may be incurred.

Q: Can the IRS levy my IRA?

A: Yes, the IRS has the power to levy almost all of your income and assets, with few exceptions, such as workers’ compensation.

Q: Are legal fees for a divorce deductible?

A: Many of the legal fees for a divorce are not tax-deductible, except for the portion relating to taxable income.

Don’t Take “No” for an Answer!

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What does not taking “no” for an answer have to do with financial matters? Plenty! Very often when we ask for something the response is “no” or is not what we wanted. This can happen when dealing with business or personal matters and it can cost you significantly.

When applying for a loan, it is not uncommon to get denied or receive unfavorable terms. But should you accept this or keep moving along? Unfortunately, we tend to take rejection very personally, but we have to be objective, see what we can do differently, and ask another lender. If getting a loan for your business or a mortgage is crucial to your livelihood then it is important to seek another lender.

What about asking a customer service rep for a lower rate on your credit card? Nowadays, the credit card companies are very hard to negotiate with, but that doesn’t mean that you should stop trying.  When you don’t get the rate you are looking for, then ask to speak to a manager, or maybe even try to call back at another time.

Has anyone ever told you that you should not start a new business venture or switch jobs? Don’t take “no” for an answer. If your plan is well thought-out and it really makes sense then do not let anybody tell you not to do it.

We only have one lifetime so make sure that when you look back at your life you were not afraid to move forward. Don’t let anybody tell you “no” when you believe the answer should be “yes.”

Children and Tax Benefits

With the upcoming birth of our son or daughter, I thought it would be appropriate to write about the tax benefits of raising children. The rules can get tricky, and your children must meet certain criteria to become your qualifying children for tax purposes. Here are a few highlights:

Dependency Exemption: For each qualifying dependent child, you can exempt from your income $4,000.

Child Tax Credit: For each qualifying child under 17 years of age you can receive a credit of up to $1,000 per child. The credit phases-out after your modified adjusted gross income is greater than $110,000 for filing jointly and $75,000 for filing as single or head of household.

Child Care Credit: If you pay for daycare, after-care or preschool so that you can work, you may be eligible for a credit of 20% to 35% of the cost, up to a maximum of $3,000 of qualified expenses for one child and $6,000 for two or more. Your children must be under age 13 to qualify.

Education Credits: There are several credits and deductions available for education expenses:

– The American Opportunity Credit provides a credit of up to $2,500 per eligible student for the first four years of college (100% of the first $2,000 of expenses and 25% of the next $2,000).

– The Lifetime Learning Credit provides a credit of up to $2,000 for an unlimited number of years (20% of the first $10,000 of expenses).

– The tuition and fees deduction provides a deduction of up to $4,000 as an adjustment to income (this means that you do not have to itemize).

– Student loan interest deduction allows for a deduction of up to $2,500 as an adjustment to income.

There are income limitations for each credit and deduction which vary widely based upon your modified adjusted gross income and filing status.

Income Shifting: If you are self-employed, you may be able to hire your minor children, pay them wages, and not have to pay income taxes or payroll taxes. Even if you do not own a business you may still be able to shift investment income to your children to minimize taxes. It takes a lot of planning, but strategizing can save a lot of taxes.

These are just some of the tax benefits to having children. Hopefully this will help to offset some of the cost of raising a family.