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Should You Balance Transfer Your Way Out Of Debt?

It feels like every day we get another letter in the mail offering us the opportunity to get a new credit card. Most of them come with some kind of deal, which is usually 0% for six months if you balance transfer from your current credit cards. Some people give thought to using the process of transferring debt as a way to get out of credit card trouble. Can it work? Let’s talk about it.

The missing leg mystery
Rich Bamford via Compfight

Any time your debt is at a low interest rate, it’s a good thing. Even when we talked about interest rates not always being the best option, when it comes to outstanding debt it’s always the best option… if you’re already in that position.

Let’s talk briefly about the benefits of balance transfers. The benefit of transferring debt to a lower interest rate card is that the amount of overall debt you owe will go up at a much reduced rate. If you have the capability of paying more on your credit card than the minimum, you could reduce your debt load much faster. If your debt is high you’re probably not going to pay it off before the free period ends, but you end up in a much better debt position overall.

If it were all so simple everyone would be doing it, and there are a lot of people who are doing it. What often happens is that people transfer to a lower interest rate card, which means they also have smaller payments they have to make. That’s so enticing that people feel they’ve gotten a second bonanza and only pay the minimum amount, using the extra cash for other things instead of paying down their debt. Credit card companies are counting on this because they want to build your debt up and extend it as much as possible.

Something else that people don’t pay attention to is what the interest rate will be after those six months, and some of the terms that come along with it. At least the federal government has put regulations into place that says these companies can’t jack up the interest rate on the outstanding balance… at least not immediately. If you’re behind on your payment just once, even by a day, they then have the right to jack up the interest on everything, and these days the going rate is 30%.

The last thing some people do is transfer their outstanding balance on one card to another, then either start using the new card or, even worse, add more to the card they just transferred their balance from.

To make this type of thing work takes discipline. If you don’t have it then you could end up in a worse position than you began with. You need to have a plan, and that plan has to include:

1. A faster way to pay down a big portion of your balance. At the very least, you need to try to pay at least the minimum payment balance amount that you were paying on your previous card, which was probably higher than your new card. That’ll bring your debt down somewhat, although it would be better if you could pay double the amount of your new payment each month.

2. A way to pay down other debt so it doesn’t grow while you’re concentrating on this one. This means you have to be strong and not use your other cards, or do anything else to put yourself in trouble that you can only get out of by using all off your new and previous credit options.

3. A budget to stay on track with your spending. You knew that budgeting word was going to come up, didn’t you? There’s no way for you to keep track of your finances without doing one.

4. Realizing that without changes, you’ll be in the same boat, only worse, in due time. Nothing to add to this one as it’s a warning on its own.

Just these 4 things can help you go a long way; unfortunately, they’re not easy for everyone to do. You know yourself, so hopefully you’ll make the wisest decision possible.
 

Take Care Of Your Necessities First

A couple of years ago we asked this question: have you started budgeting yet? It’s a fairly important question because we’re of the opinion that you can’t grow and maintain your finances without knowing how much you make, how much you need to pay out every month, and how much you have left over for everything else. We highlighted 3 things in that article:

* your bills are under control

* you have more money in your checking or savings account

* you have more peace of mind because you’re not as worried about paying your bills

Farben und Vitamine
Gertrud K. via Compfight

To expand on this topic, we felt it was a good time to talk about “wants” versus necessities. You’d think this one would be easy, but often we find that what many people believe is important to them isn’t really all that important in the scheme of things. These may or may not be bills you’ve put within the budget, but it’s important enough for you to think about the necessities first… even moreso than all the bills sometimes. Shocking? Let’s find out.

Necessities are the things you absolutely need to have to survive. Food and water come to mind, but our needs are bigger and more specific than that. Some needs might look like “wants”, and some “wants” might contain needs. It’s all in how we think about these things to determine what we have to consider.

Let’s look at water for a minute. All of us need water to survive, even more than we need food. Without water, you can only survive 8 to 10 days.

Is water “water” though? Many people believe they need to buy bottled or filtered water instead of using tap water. True, truly filtered water is better for you, but not all bottled water is really filtered. Even if it is, the cost of water can be prohibitive when you’re on a tight budget.

Water bills are generally pretty low; in some communities you’ll end up paying less than $25 a month. Filtered bottled water will run you close to a dollar a bottle; you can’t survive on only 25 bottles of water in a month. You can get other bottled water for less, but unless you’re living in a place like Flint, Michigan, it’s probably not much better than what you’ll get out of your tap. This is one of those instances where you need to figure out what’s more necessary in your situation or what you feel you can afford.

The next necessity is food. If you have water, you can survive up to a month without food if you have to. Gandhi used to regularly fast upwards of 21 days at a time during his many protests.

Once again, is food “food”? If your budget is tight, do you still buy a lot of organic food which in some instances is 3 times the price of non-organic? How long can you survive on boxes of macaroni and cheese and stay healthy, even though it’s the type of food that can go a long way? Do you know how to shop for the best price so you can afford to buy healthier food here and there while supplementing it with other things? Have you mastered the art of buying in bulk?

One more necessity is clothing. We need clothing to keep us warm, to be able to leave the house, to perform a job… along with a host of other things. All clothes aren’t equal, but some are more equal than others (to quote from Animal Farm).

Clothing can be a much different thing to figure out. For instance, if you’re working a corporate job and are on a fast track upward, then designer clothes are probably what you need to buy, which is a big but necessary expense. For most people, casual wear will probably suffice. There may be a nominal difference in quality between buying a $15 cotton shirt or one for $3, but you need to determine what’s necessary for you at the moment. If you can buy 5 shirts for the same price as buying one, isn’t that a great way of stretching your budget and taking care of a necessity?

It might seem like nitpicking, but the truth is that every day most people end up making the wrong decisions based on a misperception of what’s necessary in their lives. I knew someone who decided she had to pay $450 to have her hair done and neglected to pay her $250 energy bill. Others might feel the need to buy clothing rather than food or water. Figuring out what’s necessary could help you buy all 3 items, even if they’re not of the highest quality.
 

Should You Start A Health Savings Account?

Since the Affordable Care Act’s long term life is up in the air, it’s time to start looking at other health care options to help you with medical bills in case you need medical help. This might leave the option of a health savings account as one of your only options, at least for a short time period.

A health savings account (HSA) is a medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan. The benefits of having one is that it’s tax free and you can rollover anything you’ve accumulated from past years. The downsides are it’s only available if you’re in a high deductible health plan and unavailable if you have Medicare, Medicaid or Tricare coverage.

If you have one of these high deductible insurance plans now, it’s not a bad idea to have a HSA. Even if the ACA goes away, it won’t be immediate, which means any money you’ve saved will still be tax free if you need it. The most you can put into it is $3,400 for individuals and $6,750 for families; if you’re over 55 you can add an extra $1,000.

If you’re employed, you can have your contribution automatically deducted from your paycheck, which is the easiest way to go. Otherwise, you can add money to it whenever you want. Also, you can decide to invest your contributions, which could help you build your health funds (it could also go the other way; something to think about).

You’ll get what looks like a debit card and be informed of your balance monthly, and that’s what you’d use to make your payments. It’s pretty simple, and easy to track.

On the other hand… if you’re going to go through all that trouble, it might be just as easy to create a savings account and start funneling more money into it just for this use. True, it’s not tax free, but you’ll have total control of it and not have to worry about whether or not the ACA health plans are going away. Right now one of the houses of Congress is advocating a HSA health system, so it’s possible that starting one might be a safe bet, but it might not be the same type of plan it is now.

In the meantime, you still need to make sure you have health care coverage for the time being. The penalties for going 3 months in a row without coverage could be as high as $2,085 for the year, or 2.5% of your income… whichever is higher. Protect yourself; your health is worth it.
 

Tax Filing Changes For 2017

Time for our annual tax update for all of our clients. Those of you who aren’t our clients yet can read this and decide to become a client of ours; we won’t mind! 🙂

IRS 1040 Tax Form Being Filled Out
Creative Commons License Ken Teegardin via Compfight

As a reminder, New York State’s Corporate Minimum Fixed Dollar amount is based on Gross Receipts. Extensions should be filed by the beginning of March if possible to allow time for processing. For those of you who file extensions and may owe tax, it is important to note that the tax is due April 15 for personal returns, even if you do not file until October.

New for 2016: Affordable Healthcare Act.

Most of you are aware of the government mandated health insurance. There are many facets to this law, but for 2016, the penalty has increased to a minimum of $695, for those who are not covered by a health insurance plan. If you are married with dependent children it can be upwards of more than $1000, depending on how long you have been without coverage, etc. The penalty is calculated on and reflected on your tax return.

Here are a few of the of the credits/deductions that have been made permanent:

* Educator Credit $250
* Sales tax deduction on Schedule A Itemized instead of state and local income tax
* 179 Depreciation Deduction – Limit is set at $500,000 with a cap of 2 million
* Charitable distribution from and IRA (tax free) for individuals over 70 ½ years old
* Mortgage Insurance Premium – Deduction on Schedule A

For those of you who have children in college, the American Opportunity Credit is still available up to $2,500, which can be used for all four years of post-secondary education. Of the $2,500 40% may be refundable, up to $1000. The lifetime learning credit is based on the first 20% of the first $10,000 of qualified expenses.

The Student Loan interest deduction is still limited to $2,500 per year.

The maximum Earned Income Credit for 3 children is $6,269 and $5,572 for 2 children.

The standard business mileage rate for 2016 is 54 cents per mile, medical and moving are 19 cents per mile and charity is 14 cents per mile.

Please note the IRS is delaying all refunds that include EIC until February 15, 2017. Please see page 2 for more information.

As with any tax law change, there are always exceptions to the rules. If you have any questions, regarding any of the new tax law changes, please call us at the office and we would be more than happy to answer them.

The IRS has put more responsibility on the tax preparers regarding due diligence. We have more paperwork to process while doing a tax return, in addition to asking more questions of our clients that may be redundant.

For those of you that qualify for Earned Income Credit, Child Tax Credit or the American Opportunity Credit (College tuition Credit), please make sure you have the following information readily available when you have your taxes prepared:

1098T College Tuition statement (cannot get credit without form)
Child’s report card, medical records, child care provider record, or other documentation

Additional questions will be asked when your tax return is being prepared in-order to comply with the new rules implemented by the IRS. Thank you in advance for understanding the mandates that are put on us as we prepare your tax returns.

Every client of ours receives a copy of their return when it is prepared, and we’re adding a new feature this year. Each client will receive a CD with a PDF file of their tax return. We are hoping with this new addition you’ll be able to download the information to your computer and have your tax return readily available as needed. If an additional copy is needed throughout the year, the fee will be $15.

As always, we hope you’ve had a safe and healthy holiday season. We look forward to seeing you during tax season.
 

Educational Debt Can Be Overwhelming

These days one has to ask themselves if the cost of getting a quality college education is worth it. A degree from a major university can end up costing more than 2 good homes, especially if the student decides to go for an advanced degree. One has to ask if it’s worth it and, if so, how they’ll be able to pay for it.

Joint Graduation Day
Sarah R via Compfight

Unfortunately, college debt is one of two debts that you can’t erase if you declare bankruptcy; the other is tax debt. College debt, though it can’t get anyone throw in jail or fined, will most often be higher and harder to deal with. This is because lenders don’t always work with families on how much needs to be paid monthly, though most will work with you as to when you have to start paying on it.

At some point one has to figure out what’s worth it and what’s not worth it when going to college. For instance, is a bachelor’s degree from Harvard really worth more than one from a 4-year state school?

In general no; if the student went to college for theater who’s going to care? If it’s for an accounting degree, probably not. Political science, with an intention on being a politician someday, sure. A law degree; absolutely.

Then there are the advanced degrees one has to think about. Is a master’s degree from Yale really all that much different than a master’s degree from UCLA? Aren’t both big name schools? And won’t the degree from UCLA not only cost thousands less, especially if you live in California, but you’ll also be in better weather?

In any case, if you or a family member is still looking to go to a big name college, you need to have a plan for attacking the debt once college is over and the student is ready to go into the workplace. You also need to figure out way in advance the potential income ratio matched against how much it costs to go to school.

In today’s economy, if the student is getting a master’s in education and want’s to be an elementary school teacher, it’s going to be hard come close to earning enough to pay off a college loan. If the student is going for a doctorate and hoping to land at a major university, there’s a possibility, but nothing’s guaranteed.

The same goes for the medical field. Specialists such as a heart surgeon will easily be able to pay back the loan in good time. If the hope is to be a general practitioner, it might take working 12 to 14 hours a day to have any chance of keeping up on the payments; so much for luxury living.

Parents and students need to be realistic in protecting the student from crushing debt after graduation. There are many good colleges that one can get a very credible 4-year degree from. Many of those same schools offer competitive pricing for masters degrees as well. It’s something to think about for the future.
 

What Is Your Self Employment Worth?

This looks like a strange question being asked, especially if you’ve been thinking about going into business for yourself or you’ve been in business for a while, but it’s got a big meaning. Moreso for those new to business than those who’ve been in business for a long time, it seems most people have a problem in figuring out not only how much they should charge for services but how much their worth… aka, what their value is worth.

Premier Wynne announced the successful completion of Project Advantage; a program that enabled a group of four medium-sized, family-owned bakeries to collaborate to increase production and create new jobs.
Premier of Ontario Photography via Compfight

Even though every business is different, there needs to be a starting point one should look at when they first get into self employment, and then try to grow from there. We’re going to offer a few things to consider.

The first thing to consider is how much you’re making working for someone else. If you’re making at least 25,000 a year, your initial goal should be trying to earn at least 50% more than you’re making now, with your goal within a couple of years to be making at least 100% more.

Why? You have to consider what you’re losing by working for your present company. The cost of health insurance, even if you’re paying some amount for coverage at work, is going to go up drastically, at least 50% over what you’re presently paying. You’re also expected to pay it in a larger lump sum monthly as opposed to paying a little bit every week or two weeks. True, you’ll have options for coverage, and in most states there are multiple choices based on your state’s ACA (affordable care act) exchange, but it’s something to consider.

While we’re on insurance, if you had dental, vision, or any other type of insurance that’s now coming out of your pocket as well. These aren’t overly expensive to buy on your own unless you have a physician you already like, which can be problematic in some states or smaller communities; then you’ll likely have to pay more to keep that person.

The second thing to consider are office supplies and other equipment. You don’t have an employer to rely on for these items, and even though you get to write them off on your taxes, the amount up front doesn’t benefit you.

The third thing to consider is time off. Right now you probably get vacation and sick pay; that’s not happening when you work for yourself. This means you’re going to have to be disciplined enough to put some money aside for those rainy days unless you can work from home, possibly in bed via a laptop or tablet… although you might not feel like it.

All other bills aren’t mentioned because if you started off making the same amount of money you were making while working for someone else you’d probably already figured out how to pay those bills while still being able to eat and put gas in your vehicle.

Now, notice we started talking about making more than 25K. If you’re making less than that, or not even close to that amount, you’re going to want to think about making at least 75% to 100% more up front to cover those same items as above. The difference maker is that you’ll probably qualify for a bigger subsidy from the ACA, thus you won’t have to worry about paying for health care, and you might even get a reduction on dental coverage; vision care is still on you.

These aren’t set in stone, but it’s a pretty good guide to start with. What you have to do if you consider working for yourself is change your mindset from employee mode to professional mode. Professionals have the right to make more money because they have more expenses. As long as you have a place to start, you can determine what you want to make from there for your products or services.
 

Writing Off Home Office Expenses

Most small business owners working out of their home knows they can write off expenses for their home office. Still, not all that many of them do, and they might not know how it all works. We’re going to offer a few bits of information that might help you save money on your taxes.

The first thing you should know if that you have write offs based on the dimensions of your office. If your office is 10×10 as an example, you get to write of $5 per square foot, which in this case comes to $500. There’s a maximum level of 300 square feet, or $1,500. This is called the “simplified method”. A more technical method involved figuring out the percentage of your house you’re using for work, such as if you’re running a day care out of your home or you have a studio where you work on projects that you want to claim. If you have extra complications like that it’s easier to work with an accountant to help you figure it out properly.

The qualifications for doing this is that you do a substantial amount of work from your home office, but it’s rare that anyone will check to see how much work you’re doing from your home. It’s supposed to only be used for business, but the definitions would be hard to prove either way. For instance, if you allow your children to use your office to do their homework it’s technically not allowed. If you use the room for other purposes, such as a laundry room (although no one would do this; just an example) then technically you’re not allowed to claim the deduction unless you have some kind of defined border showing which part is office and which part is home use.

By the way, if you’re an employee who works from home, you get to use this deduction as well. The same space rules apple as above. Strangely enough, you also get to write off expenses as it applies to your mortgage or if you rent an apartment.

Did you know if you decided to paint your office or change the flooring exclusively in there, you get to write off some of the expenses for this (you get to write off painting in full). Also, if you have a dedicated phone line for your business that counts as a write off.

If you have to store any type of inventory in your home and that room is used exclusively for that purpose you get to write that off. However, you can also write off some expenses if you use a portion of a room like a basement, as long as your home is the only location of your business.

There are a lot more exemptions you might qualify for, but truthfully it’s probably best to talk to a tax professional or your accountant to help you calculate these things and keep yourself from going crazy trying to figure it all out.

Spending Money To Make Money; How Much Should You Spend On Marketing And Education?

We often hear from some of our clients who are willing to spend inordinate amounts of money to try to make their businesses run better. We also hear from clients who are risk averse. Although there’s not really a wrong way or right way of doing things, we thought we could offer some advice on how to determine whether you should or shouldn’t spend the money, and why or why not.

Let’s talk about education. Training is something every business should spend money on. All sorts of training; sales, marketing, budgeting, education on what your business is geared towards… no matter what it is, education should always be a part of your business expenses.

It’s hard to determine how much education is enough, or how much you should spend. Instead, it’s probably easier to determine how much education you should spend money on based on location and how often it takes place.

For instance, if you can afford $200 a month for local training on something critical to a certain portion of your business, it makes a lot more sense than if you have to spend that same amount of money traveling halfway across the country multiple times, which costs you travel expenses and time away from your business.

Going to a business seminar out of town that offers something different than what you can get locally, while giving you the chance to network with others in your industry is a great benefit across the board, but it’s something you should plan on doing maybe only a couple of times a year unless you’re a vendor at that same conference, where you might be able to generate leads or business by attending.

Unless you’re a new business, we wouldn’t recommend spending more than 10 – 20% of your budgeted expenses, because you need to make sure you’re going to get a legitimate return on your investment. If you’re new, there might be aspects of training you need that might cost you more than this, but always make sure you’re not hurting your immediate ability to earn a living.

Let’s talk about assistance. We talked about hiring people who can do some of the work for you so you can concentrate on the work you need to do for your business. Although this is a wise thing to do, there needs to be some considerations on what you’re looking to do before you spend the money.

One of the biggest scams you might deal with comes with a lot of social media marketing and lead generation. Whereas there are some legitimate businesses that do this work, there are a lot of others who not only won’t get you the leads you want but could seriously jeopardize your website’s standing on search engines.

The same goes for certain types of pay per click ads. Many people will advertise on media sites and be informed about the number of impressions those ads get. Truth be told, all an impression means is that it came up on a page when someone went there; it doesn’t mean anyone clicked on your ads at all. If your ad is on the wrong type of website, you’ll spend a lot of money with little return. Yet, this is a common recommendation by some companies who want to help you set up your web presence.

The best way to evaluate marketing and any other service is by asking a lot of questions, determining what those other people can do for you that you either can’t do for yourself or don’t want to always do on your own, determine how much you believe you can afford and stick to that budgeted plan. Even if others are going to be doing some of the work for you, it’s imperative that you set up a schedule for when they should be reporting to you on what they’ve done for you, and always stay involved to make sure you’re getting your money’s worth. One last thing; don’t always go for the cheapest option!

Paying Estimated Tax When Your Income Is Low

Many small businesses ponder the question of whether they should, or are supposed to, pay estimated tax quarterly when their income is low. It’s an interesting question, so let’s take a look at it.

When you look at the tax code, there’s a line that states: “Those who have income from their own business will need to make estimated tax payments if their tax liability is expected to be more than $1,000 for the year.”

This highlighted part begins the whole show, along with this one: “If you owed taxes at the end of last year, it probably means that too little was withheld from your paychecks, or you had other income that increased your tax liability”.

Let’s take the first one. The reason tax liability is highlighted is because it indicates what you might have to pay, not how much you’ve earned. This is an interesting distinction because, although you have to file taxes if you make more than $400 in a calendar year, the odds are that if you didn’t make a lot of money for the year that your tax liability won’t come close to owing $1,000.

Many small businesses have seasons where they might make a lot more money as opposed to making it all year round. If that’s the case, then making estimated payments when that time period comes up can make a lot of sense. However, paying every single quarter might not be feasible for you if you have to stretch your money out, so it can be a tough decision.

The best thing in this case is to at least pay something, even if it’s only $50, because you not only have to deal with the federal government but in some states they’re going to want a piece of you as well.

A caveat to this is if your spouse is earning a full time income and has taxes being taken out by their employer. In this case, if you’re filing jointly, you can probably get away with not paying anything because the bulk of the tax liability will be coming from them. It doesn’t hurt to hedge your bet though; you could end up getting your entire payment back.

Now let’s look at the second one. This one is a bit different because when you owe money and they don’t see estimated payments, and you don’t have a spouses income to offset your own, the IRS starts expecting you to pay quarterly, especially if you go on a payment plan.

If you can pay your balance within 3 months or so they’ll usually leave you alone; the IRS isn’t as scary as they’ve been made out to be. If you can’t, then you might have to deal with them at some time. Just remember that you can make small quarterly payments; at long as they get something they’ll leave you alone.

Our advice would be to try to make some kind of quarterly tax payments just to be safe. Obviously if you make a lot of money it’s the smart thing to do. If you don’t, and you can’t, don’t immediately worry about it because you’ll always have both time and payment options to catch up when you can.
 

Figuring Out When To Pay Someone Else For Work You Can Do

A common event with many business owners is when something either goes wrong or needs fixing and, instead of hiring out, they decide to take care of it themselves. Even if they can take care of the issue, one has to ask themselves if it’s always the wisest choice at the time.

~Cookiecat at Computer~
~Sage~ via Compfight

If income is a problem then there’s no question that if something needs to be taken care of and you can do the work that you should do it. However, even here, sometimes it might pay off to have someone else do at least a portion of it.

For instance, let’s say that part of your marketing campaign is to send out 50 letters a week for a month. You have a standard letter already set up and all you have to do is fill out the envelopes. The thing is, even if you’ve already printed out the letters, folding, sealing and putting stamps on those letters could take you 3 hours to do. If your hourly billable rate is $100 an hour, you just lost the opportunity to make $300.

In this case someone like a virtual assistant might have been the way to go. Many VA’s cost less than $20 an hour, and whether you supply them with the paper, envelopes and stamps beforehand, those are things you’d have had to purchase yourself. This means that not only would your costs have only been $60, which you could have written off, but you might have been earning money during that same time which means you’d have made $240 off the deal.

Let’s look at something much bigger. One of my clients recently realized that a few of his websites were losing traffic because he hadn’t upgraded them to the new Google standards of mobile speed capability. The cost for hiring this work out would have cost at least $2,000, which is a hefty sum.

Since he had the technical capability to do it himself, he decided to take that task on. The thing is, even though he knew a lot, things had changed over the years so he had to do a lot of research and testing. In the end, he put in at least 120 hours on those websites, and though he got things taken care of, since his billable hourly rate is $125, if he’d had a client or been working towards a client he could have possibly made $15,000. At the very least he could have been marketing his business and attained a new client.

It’s hard to decide when to let things go that you can do, but sometimes it’s worth taking another look at your projects and trying to figure out whether it’s cost effective to have someone else do it instead of doing it yourself. Always remember that you can write off all paid services that relate to your business and that might help you make a different decision if you need to.