6 Tips How To Better Handle Beneficiary Designations

6 Tips How To Better Handle Beneficiary Designations

“Bear in mind the wonderful things you learn in schools are the work of many generations. All this is put in your hands as your inheritance in order that you may receive it, honor it, add to it, and one day faithfully hand it on to your children.”

Albert Einstein

 

 

Create your estate plan so you will have control over your asset distribution to your loved ones during your lifetime. Aim for your plan to be as litigation-free as possible. Beneficiary designations are an important way to in distribute most of your assets effectively.

Most of your assets can be easily transferred to your intended heirs quickly. You will avoid often painful and lengthy probate court procedures. Your will actually doesn’t control who inherits all of your assets. In reality, the majority of the average person’s assets are transferred by contract.

Transferring Assets Outside Of Your Will Is More Efficient

Many of our assets are nonprobate property. As such, they are transferable to survivors by contract immediately upon death rather than under a will.

The advantages of contract transfer over the distribution of assets by a will are less time, cost and more privacy. Transfers to loved ones by a will could take 6 months-1 year if probate is not required. If contested in court, the distribution could take longer. Even worse, your will would be made public through court documents.

We will explain how to make proper beneficiary designations so that our intentions are carried out.

First, let’s discuss the 3 ways nonprobate property may be  transferred by contract:

 

1.  Designated Beneficiary(ies) Upon Your Death

A beneficiary is a person or organization designated to receive a benefit. You can and should also designate a contingent (or secondary) beneficiary. Sometimes the first named or primary beneficiary dies after the form was filled out. Most of you have seen one but here is an example of a form to select your beneficiaries for those who want to take a look.

We usually get the form from our employer or a financial company. It takes only a few minutes to fill out yet carries significant repercussions if incorrectly filled out or ignored. That will be part of our upcoming discussion. You should name beneficiaries for all of the assets that you can.

Your nonprobate property are assets that are transferred to survivors by contract upon your death to your designated beneficiary.

Check With A Professional On Legal And Tax Issues

There may be legal and tax ramifications to be aware, especially your designated beneficiary is already receiving governmental benefits. Estate distributions to a beneficiary may require payment of an inheritance tax in certain states but not from the federal government.

 

Among your nonprobate assets:

  • retirement accounts, including 401K  plans, 403b plans, SEPs, sole 401Ks, Keough plans  IRAs, pension plans
  • 529 college savings plans
  • investment accounts, mutual funds accounts
  • payable-on-death clauses in bank accounts, credit union
  • life insurance policies or
  • by owning joint accounts with another person, usually a family member,  through rights of survivorship.

These assets are generally transferred directly to those beneficiaries that were designated by you.

When you first opened these accounts, you received a legal form to complete that provided you with the opportunity to designate your beneficiary.

Review beneficiary designations periodically

For example, if you designated your mom when you first set up your accounts, it is probably a good idea to refresh your beneficiaries. Often, after life changes such as a divorce, remarriage or the passing of a loved ones, our beneficiaries should be updated.

2. Property Ownership Designation

Husbands and wives (or parents and children) may have joint ownership of assets called joint tenancy with the right of survivorship.

Each person owns 100% of the asset. These include bank accounts, investment accounts and cars. They can dispose of these assets without the approval of the other owners. However, in the case of jointly owned real estate, most states restrict the ability of a co-owner to sell or burden the property without the consent of the other.

Upon the death of one owner, the assets are transferred on death (TOD). The surviving owner(s) will receive this property by operation of law, rather than through the will.

3. Payable-on-death (POD) designation

Similar to TODs, the designated beneficiary has no right to this property, usually a bank account, until the owner has passed away. Once the owner has died, the beneficiary will provide a copy of the death certificate and show proper identification to access the account.

6 Tips to Ensure Your Designated Beneficiaries Are Proper:

 

 

1. Don’t Forget To Name A Beneficiary

We live busy lives. We get a ton of forms when we start a new job or open new accounts.  We may lose them or forget where we placed them. Worse yet, we honestly want to fill them out but we are unsure or procrastinate over making such decisions. The form truly takes a few minutes and it is better to reasonably identify a loved one rather than leaving the form blank.

Absence of a designated beneficiary may result in the respective assets going to the estate itself to be shared among several people rather than the sole designee.

2. Name A Contingent Beneficiary

Besides naming a primary beneficiary, it is important to name a contingent beneficiary in the event the primary beneficiary has either passed away before the owner of asset or has become incapacitated. It may have been several years since the designated beneficiaries were selected.

3. Reviewing, Changing and Updating Your Beneficiary Forms

When you first start a job or open an account you may have been idealistic as to who you wanted to receive your assets. I have had friends select their boyfriends. Our lives go through a myriad of changes such as marriage, having children, divorce, and our interest in varying social causes.

We need to periodically review, and if necessary, update our beneficiaries who we are intending our assets to go.

My First Designated Beneficiary

When I first started working after college, I actually named my brother Mark as a beneficiary. I was 20 years old and he was starting high school. As “big sis” starting work right after college, I wanted to do something special for him. Being naive I thought he would like the gesture. I left the job 18 months later so it didn’t have a lasting effect. However, many of our decisions do.

Common Mistakes: An Ex As Your Beneficiary But Your Youngest Isn’t Designated

Your former spouse may still be listed as a primary beneficiary even though you haven’t talked to that person in years.  You have been working at your company for a long time and inadvertently neglected to name your youngest child or have since adopted the children of your second spouse.

Reviewing your beneficiary choices are often easily done online or through investment account statements you receive in the mail.

Another reason to review your form may be that you have been at the same firm for 35 years (congratulations!). However, are you sure your company still has the form on file?

A True Story

Someone recently told me that a family member had recently been diagnosed with a serious illness. They wanted to make sure they had insurance for the upcoming surgery.  The company told him that there were no records of designated beneficiaries on file for the years around the time he began working there.

Forms get lost when companies move, especially during the pre-digital age (after the times of dinosaurs)  and it may not have been converted online.

4. Be Careful When Designating Those With Special Needs

There are three possibilities that need special consideration and requires the expertise of an estate attorney and/or accountant to consider:

Minor Children: Differences Between Probate And NonProbate Properties

We often may name our children as designated beneficiaries on forms as well as in our wills for probate assets There are legal ramifications that you should be aware of.

It is fairly common for parents to have testamentary trusts within our wills that assert minimum ages for our children to have access to assets. They may want to restrict their children well past the age of majority (usually 18 years of age) to 25 or 30 years. Testamentary trusts, usually contained in wills are trusts that go into effect upon the death of the grantor.

A trustee is often used to administer the assets at their discretion until the beneficiary reaches that appointed age.That works for probate property.

Outright Distribution To Beneficiaries: Age Should Be Considered

However, the will’s contents which may carry a parent’s intentions, is trumped by beneficiary designations for nonprobate property.  This means that if a parent passes while the children are of minor age,  property, such as an insurance policy or a bank account, will pass to them automatically at 18 years. Most young adults cannot handle significant funds without supervision. Although research shows an inheritance lasts 5 years, it can much shorter in a younger individual’s hands.

Therefore, you may want to name the estate as your designated beneficiary rather than your children outright or create a living trust which can be changed as your children age. Your estate attorney can provide help on this area.

Background on Living trusts

Trusts can be used before death, as living trusts. These trusts are standalone, that is, independent of the will. These instruments can take effect while the grantor is alive. The grantor is the one conveying the property to the heir. It can give the grantor the right to make changes.

These are called revocable living trusts and the grantor can be the trustee. However, if the grantor is unable to serve because of becoming incapacitated, a new trustee can be named.

 

The Irresponsible Adult May Need Special Consideration

The naming of an adult child who is known for being irresponsible with money may need to be treated differently. In that case, you should speak to an attorney regarding the set up of a spendthrift trust.

This kind of trust is designed for the benefit of a person that is unable to control their spending. It gives an independent trustee full authority to make decisions on allocating money to the beneficiary.

Individuals With Disabilities

You need to be careful about naming a disabled individual as a designated beneficiary. You may jeopardize that person if they are already receiving governmental benefits, such as social security benefits. If they were to receive assets from your designation upon your passing, it may inadvertently prevent them from receiving further governmental aid.

5. Make Sure You Have Correct Spelling of Intended Beneficiaries

When you are designating an intended survivor, they may have a  name that is commonly misspelled or a title like Junior, Senior, or the III after their name. Check that you are indicating the correct person. It is always wonderful to give to others but make sure it is the person you intend.

6. If In Doubt, File A New Form

Having correct and updated forms are very important especially when you have retirement accounts, life insurance, bank and investment accounts. If you think about how your life has changes in recent years, you may just want to go the easier route of filing a new form for each of your assets that can be transferred outside of your will.

Conclusion

By keeping your beneficiary designations, and all of your estate planning documents current, you are providing the best protection for those you care about the most. A small amount of your time and effort may cover the vast majority of your assets.

Protect your assets and have a good plan to distribute them to loved ones. You don’t want to add potential angst to their grief. Engage an accountant to help you realize tax efficiencies and estate attorney for special situations.

Have you started reviewed your beneficiary designations recently? It is usually easier to do when you have no urgent reason to do so but are thinking of your family’s best interest. Start thinking about your assets and which ones are nonprobate property and consider reviewing them or file new ones.


Related Post: Your Guide To Basic Estate Planning In 6 Steps

Please share any thoughts or comments you may have. We would love to hear from you!

 

6 Ways To Raise Your Credit Score

6 Ways To Raise Your Credit Score

Our financial lives depend on our creditworthiness. When we go for a loan, lenders review our credit report and our FICO credit scores to determine what our annual percentage rate (APR) should be. Generally, the higher our score on a 300-850 score, the lower the borrowing rate we will pay on our loans for our car, mortgage or college tuition.

7 Reasons Why You Need  To Review Your Credit Report And Score:

 

  • Knowing where you stand before making important financial decisions.
  • Borrowing for a home purchase.
  • Car loan or lease.
  • Student loan.
  • Checking for inaccuracies, identity theft, and fraud.
  • Getting a job.
  • Renting an apartment.

 

Can You Improve Your Credit Score?

The short answer is yes, you can!  We will go over tips to increase your scores. First, let’s talk about how the FICO Scores formula is calculated with its five different criteria of the total:

Payment History: 35%

This carries the greatest weight in your score and is the most important factor. The longer the credit history the better. Having a good track of not missing payments and being on time works in your favor.

So those who are new to being approved for their credit cards need to show a consistently positive pattern.  These are different account types such as credit cards, retail or store accounts, installment loans, mortgages, and finance company accounts.

Credit Utilization: 30%

As a big influence on your credit score, credit utilization is the ratio of your total outstanding revolving credit balances divided by total available credit. Revolving credit refers to your credit cards and credit lines you may have but does not include your car loan (unless on your credit card) or your mortgage.

The utilization ratio is also referred to as the balance of debt to available credit or debt-to-credit. It measures how much credit you have used of the amount available to you. You don’t want to “max out” your cards. You should not be above a 30% ratio as it will impact your score. I would stay in the mid-20s range to be assured of not hitting the 30% level.

Credit History: 15%

Your experience with credit matters to lenders. The length of time of your oldest credit account and  the average age of all of your accounts determine your credit history. The older the account the better for your credit score. If you are new to obtaining credit, it will take time to get this benefit showing up in your score.

Credit Mix: 10%

Lenders favor some variety of borrowing in your mix of credit. A borrower handling different kinds of debt products may reflect less risk to lenders. Someone without a credit card tends to be seen as a higher risk. That said, don’t go out and get different kinds of loans for the sake of improving your mix.

New Credit: 10%

When you apply for new credit, that inquiry will be reflected on your credit report for up to two years. That is called a hard inquiry and can negatively impact your credit score, particularly if you are making multiple inquiries. However, don’t let it stop you from doing comparison shopping for the same type of loan.

A soft inquiry occurs when you are checking your credit score or report. Soft inquiries do not generate negative hits.

Related Post: Common Credit Mistakes And How To Avoid Them

6 Ways To Increase Your Credit Score:

 

1. Check Your Credit Report For Errors

Reviewing your report for inaccuracies and missing information may be the fastest and easiest way to improve the score. An FTC study reports that 5% of consumers had errors that may carry enough weight to result to get a lesser favorable loan. One in four consumers had errors in one of three credit reports.

If you find an error, contact each of the credit bureaus (Experian, Equifax and TransUnion). You will need to give them specific information as to what you believe is incorrect. They must investigate the item(s) you have raise usually within a 30 day period. You are able to do all of this online but it is a good idea to follow-up if you don’t hear back from them.

Fix Errors As Quickly As Possible

Initiate your inquiry as soon as you spot the error by following these steps. The credit bureaus may back burner your issue if they deem it to be frivolous so be specific and provide the needed information as part of your inquiry.

Sometimes what appears to be errors are fraudulent charges and scams.

Read our related post: 9 Ways To Better Protect Your Privacy Against Fraud And Scams

2. Pay Bills On Time

The credit bureaus require you pay the minimum amount required on time. They are looking at your payment history which counts a lot towards your overall credit score. Missed or late payments are harder to repair and can lead to delinquent payments which take 7 years to get rid of on your report.

Automate Payments

Consider automating payments online through your bank portals for credit card companies. Set up online payments with your other loan providers. Stick to a monthly schedule or pay these bills every two weeks to lessen the burden.

If you have missed payments, get current as quickly as possible. Be consistent thereafter as the creditors look for a favorable pattern of timely payments before you see score improvements.

You do not want a collection account to appear on your credit report. Even if you pay that account, it has long-lasting negative effects. It puts a 7-year stain on your report. Don’t let that be a disincentive from paying off the collection debt as it will stay on longer. You might want to check with the creditor to see if it was “charged off” as bad debt before making a payment.

Pay Credit Card Balances In Full

Although the strategy of making the minimum payment on your credit balance is good for your score, it will keep you in debt longer. It is far better to pay off your monthly debt balances in full. Otherwise, you are paying those card balances at mid-high teen interest rates.

That makes the credit card companies happy but, of course, that is not your goal.

3. Reduce Your Debt

The credit utilization ratio is an important contributor to your overall credit score. Being disciplined about your debt levels is important for the financial future. As it relates to the score, this ratio reflects how much of your available credit has been used. Lenders look at debt usage on a per-card basis as well as on total debt relative to total credit available.

Creditors look at a 30% threshold. Ratios above that level may provide negative consequences to your score. Consider targeting a lower ratio in the mid 20’s if you must carry month-to-month balances at all. You may not realize that making sizable purchases such as moving to a new home caused you violated the 30% ratio.

Raising Credit Limits Too Tempting For Some

I have read others recommend that you should seek higher limits on your credit cards to lower the ratio. That may work mathematically but for some of us it is too tempting to have more credit available to spend more. It sort of reminds me of how our elected officials thrash out at each other, then raise our nation’s debt ceiling rather than reducing our borrowings.

Rather than raise limits on your credit cards, make a plan to zero out your debt balances to gain financial flexibility or stop using your cards and spend less.

If you are having trouble making ends meet because of exigent circumstances (eg. job loss, death in the family), contact your creditors to see if there is something they can do, such as modify your credit terms temporarily. Another recommendation is to go to a financial counselor for some strategies to reduce your debt significantly.

Related Post: How To Pay Down Your Debt For Better Financial Health

4. Little To No Credit History

When you have a relatively “thin credit file” it means you don’t have much in the way of showing that you are responsible with credit yet. This accounts for about 15% of your credit score. There are a couple of things for you to do.

You can become an authorized user on someone else’s account like a parent. Make sure that they use their credit responsibly or it won’t be beneficial to you.

Related Post: A Guide To Your Child’s Credit Report: Pros And Cons

Strengthen Your Credit File

You can apply for a secured credit card where approvals are easier to get than unsecured credit cards. Your credit limits will be far lower, usually capped at around $500. You will need to post a refundable deposit as security. Secured credit cards are good for those with bad history as well as those with little or no history.

You may want to consider Experian’s recently launched free product, Experian Boost. It allows consumers to include utility and cellphone payments into their credit score calculations using this tool. It may provide an incremental boost for those with thin or poor credit history files. Basically, you are connecting your online bank account to your Experian credit report

5. Don’t Close Any Unused Credit Accounts

If you have credit cards you no longer use or need, it is better to cut them up and put those cards in a drawer and forget about them. The exceptions to de-classing them to your sock drawer are you will be too tempted to spend or if you are paying annual fees.

Otherwise, if you call the company to close the account you are likely to lose a few points off your score. Closed accounts even if they have zero balances stay on your credit report for 10 years.

Keeping the account open and unused benefit your scores at least two ways:

  • your credit utilization ratio will rise because you have removed available credit.
  • eliminating an account might hurt your credit history if it is an older account.

The impact of closing an unused account may be tougher on young people or someone that is trying to build up their credit file. I made this rookie mistake by closing a retail store’s account when I was younger. It was an expensive store and not one I found myself shopping at anymore.

I thought I was making a smart move when I closed the account and had my score dinged. I recommend the “scissors approach” and cutting the cards and put it away.

6. Apply For New Credit Sparingly And Only If Needed

Credit mix is a factor in your score though not as influential as credit utilization. Think carefully before applying for more credit than necessary. It may result in counting as a hard inquiry on your credit report and therefore a negative point reduction in your score.

 

How Long Does It Take To Rebuild Your Credit Card:

 

  • Credit errors, repairs  3-6 months
  • Closing accounts        3 months
  • Hard inquiries             2 years
  • Missed Payments       18-24 months
  • Car Repossess           7 years
  • Delinquencies             7 years
  • Bankruptcies               7-10 years

 

Credit Score Ranges Per Experian:

  • 800-850 Exceptional
  • 740-799 Very Good
  • 670-739 Good
  • 580-669 Fair
  • 300-579 Very Poor

 

How Much Of A Difference Does A Credit Score Make On Your Loan?

Using myFICO Loan Savings Calculator,  here are national 30 year fixed mortgage rates on July 22, 2019 according to the following scores:

Scores      APR                  Monthly Payment

  • 760-850    3.468%                 $2,862
  • 700-759    3.69%                   $2,942
  • 680-699    3.867%                 $3,007
  • 660-679    4.081%                 $3,085
  • 640-659    4.511%                 $3,247
  • 620-639    5.057%                 $3,458

 

If your score is currently in the 660-679 range, you can save an extra $80,263 over the life of the loan by improving your credit to the 760-850 level. It is definitely worth the effort to do so.

 

Conclusion

Most of us are in the 620-719 score range. We have several ways we can raise our credit scores incrementally and produce meaningful savings. This improves our ability to borrow and satisfy those like our landlord who want us to be creditworthy.

We should be more financially responsible by reducing debt, paying our bills on time and zeroing out our costly credit card balances. We need to have greater financial flexibility and make better decisions for our  fulfilling our needs and wants in our lives.

If you are new here, welcome! Subscriber and join our growing community, get our free newsletter, freebies and free Personal finance email course.

Related post: Are You Creditworthy? All About Your Scores And The Five C’s

Have you checked your credit report recently? It is important to review to do so for errors and ways to improve before core ahead of your needs to borrow. Do you have any experience you can share that you dealt with repairing credit errors  or increasing your score?

We would like to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Target Date Funds Pros And Cons

Target Date Funds Pros And Cons

We have a lot of choices when selecting investment vehicles for 529 Savings Plan, 401 K retirement accounts and investment accounts.

Gaining In Popularity

Increasingly, target date funds have become popular with investors. Their assets surpassed $1 trillion in 2017. That trend is likely to continue. Vanguard, in its report “How America Saves 2019,” predicts that more than 75% of 401 K participants will be solely invested in these investments by year 2022. This is above 60% in 2019.

There are benefits and drawbacks of these plans to be aware of before making your selections. First, let’s explain what a target date fund is.

What Is A Target Date Fund?

These mutual funds, known as life-cycle, age-based, and dynamic risk, are offered by investment companies like Vanguard and Fidelity. Target date usually refers to the year you are planning to retire or expecting your child to enter college.

The notion of shifting your portfolio from aggressive investments to conservative investments has been around since the 1950s. However,  these life cycle funds grew in popularity after the passage of the Pensions Protection Act of 2006.

If you plan to retire in 2050, you would be investing in a “2050 Fund.” Your investments will be managed according to a predetermined allocation that will reset over the years. The time frame would likely be shorter for college savings funds but based on a similar concept.

A Glide Path For Your Asset Mix

Typically, your assets will be heavily invested in more risky assets like stocks in your younger years. Your portfolio will then be rebalanced to a more conservative allocation in your later years leading up to your presumed retirement date. The shift of these assets are often called a glide path. This means that the asset mix in the fund will automatically shift over time.

A target date fund invests in other funds, using a “fund of funds” approach. Morningstar points out that of the record high $70 billion that flowed into these funds, 95% went to passively managed ones which are generally lower cost options.

However, one fund may have a number of underlying funds that may be actively managed. If so, they will generally charge higher fees and may carry tax inefficiencies from the trading of positions.

Active investing means giving portfolio managers discretion to select individual securities with a certain investment objective of outperforming a specific index like the S&P 500.

Benefits of Target Date Funds

 

1. Simplicity

Choosing a target date fund takes the guesswork out of the investment process. The average investor may not have the knowledge or desire to actively do their own shifting of assets from an aggressive portfolio to a more conservative portfolio.

With over 90% of 401K employer-sponsored plans offering a variety of these “set it and forget it” funds, it may be less overwhelming for employees to opt-in to retirement plans. Many people have too little in retirement savings accounts.  The Economic Policy Institute “The State of American Retirement” reported that the vast majority of Americans have under $1,000 saved for retirement and half of all Americans have nothing saved at all.

At the very least, they are better off putting tax deferred dollars in 401 K plans and to start saving for retirement as early as possible.

These funds are also good for 529 College Savings account that use tax-deferred dollars like retirement accounts do.

2. Diversification

All investors should have diversification within their respective portfolios. You should never have concentrations in one particular stock or bond. Always maintain a diversified basket of assets composed of stocks, bonds, money market securities, and real estate. This helps to spread your investment risk among US and  international markets.

Each target date fund will differ in its diversification. You need to investigate its plan to understand how diversified it is and if  it is what you prefer. For example, you may not what to be exposed significantly to international markets.

Related Post: 10 Tips To Diversify Your Investment Portfolio

3. Asset Allocation

It is important to allocate your assets into different baskets according to your risk tolerance, age and investment purpose. Different asset classes have different risks. Target funds do this automatically for you based on their predetermined glide path. Each fund may rebalance differently and continuously to correct shifts in allocation to longer term.

If you are not in a life cycle fund, you are still able do this manually by actively shifting into different index funds, balanced funds, or individual securities. However, it is far more difficult and time-consuming. You would need to be more actively managing your own preferences.

Vanguard points out that investors who held a single target date fund earned a median annual return of 11%. This is modestly above the 10.6% returns of those individual investors managing their own portfolio.

How Does Allocation Work?

Vanguard, as one of the largest investment companies, has target funds that go out to the year 2065.  For example, we can look at 30 year target date funds and see how it rebalances asset classes.

The initial asset allocation in Vanguard’s fund may be 85%-90% stocks and 10%-15% fixed income (a mix of short term money markets and bonds). This is considered to be an aggressive allocation given the riskier (and higher return) characteristics of stocks.

The Vanguard stock allocation may then drop to 80% stocks and 20% when there is 20 years left to the targeted retirement date. At the target date, the allocations may shift to 45% stocks and 55% in fixed assets reflecting a more conservative portfolio with more bonds than stocks at the time of your retirement.

These percentages tend to be static but funds may buy or sell securities to maintain the asset ratios.

T Rowe, another great investment company, tends to allocate more stocks for their portfolio in the later years. For example, its 2020 fund holds 55% in stocks versus a 43% average for target date funds according to Morningstar.

Drawbacks of Target Date Funds

 

1. One Size Doesn’t Fit All

The conventional wisdom is that younger individuals should invest more of their savings in riskier stocks. As they age, their asset allocation should transition to safer, more conservative assets, notably bonds and money market securities.

This has generally been true, considering that younger investors have longer time horizons to ride out market volatility. Additionally, they have more years to work and generate earnings.

However, there are certain trends that tell us target date funds aren’t for everyone. Individual investors may have too much risk or too little risk relative to their own circumstances.

2. Greater Income Volatility

Increased household income has become less predictable since the 1970’s. A 2012 study “Evolution of Household Income Volatility” reports that family’s inconsistent income has risen 30% since the early 1970s. This occurred as a result of a number of factors, notably deregulation, globalization, technological advances and the onset of the financial crisis and Great Recession.

If you are among those who have monthly swings in income, higher allocation in stocks may not necessarily be desirable for you even if you have a longer time frame to ride out downturns. Your goals may be different in terms of savings and investing.

Related Post: Related Post: 10 Tips To Handle Stock Market Volatility

 3. Retirement Age May Be Going Up

“Full retirement age” has moved up a few years as reflected in that our ability to collect 100% of our social security benefits. It has now been raised to at 67 years. Many educated older workers are also working well beyond 65 years. In any case, it is difficult for anyone in their 20s and 30s to contemplate their target date with accuracy.

4. Higher Life Expectancy

Due to many medical advances, people are living longer. Security Administration has a life expectancy calendar that you can use to calculate life longevity for men and women. A man reaching 65 years today may expect to live to 84 years while women may live to 87 years. Some studies show longer life expectancy especially if you are younger today.

As such, target date funds may need to lengthen our investments. Perhaps they can be tailored to the reality of longer or different life cycles so there will be enough retirement money to live on.

5. Fees On Funds Are Confusing And Potentially Excessive

Before picking an age-based fund, review their fee structure as they vary quite a bit. Vanguard target date funds are truly the gold standard. Their asset weighted fees are the lowest. They range from 0.09% for the funds that target retirement in year 2040, rising to 0.15% for their 2065 fund.

In contrast, asset weighted fees on target date funds offered by Fidelity and T Rowe are relatively reasonable at 0.61% and 0.69% respectively. That is roughly in line with the 0.66% fee as measured by Morningstar. Be wary of possible excessive fees charging rates of 1% or higher.

Two Layers of Fees

Many target date funds are funds of mutual funds. Investors may be charged two layers of fees. One fee is for target fund and another for the asset-weighted average of the management fees of underlying funds. Essentially, you may be overcharged for what amounts to computer-driven asset allocations based on a calendar.

6. Target Date Funds May Underperform Other Funds

Some studies have shown that 50/50 balanced funds, meaning allocations of 50% stocks and 50% bonds may perform better than target-date funds. Balanced funds charge lower fees.  A study done by Rob Arnott of Research Affiliates used Monte Carlo simulations for 1871-2011.

Monte Carlo simulations are used to understand the impact of risk and uncertainty in prediction and forecasting models. This study reflected the outperformance of gains of $170,480 for balanced fund versus $159,130 for target date funds.

7. No Guaranteed Returns

It is important to remind investors that these funds do not guarantee returns. The formula-driven rebalancing and respective returns of different securities may suggest otherwise to investors. As such, 30% of investors believed these funds carried assurances of guarantees according to a survey commissioned by the SEC.

Final Thoughts

Target date funds have a role to play in the individual investor world. As always, when something seems too simple, it usually isn’t so. It is a great way for people who are sitting on the sidelines and neglecting to save for retirement. These funds are a good way to participate and you can make changes later on.

When it comes to employer-sponsored 401 K plans, find out what the minimum amount you need to contribute to potentially get a match contribution. That’s like finding free money.

Check the features of the various offerings available from the investment companies. Look at the asset mixes through the life cycle and how it conforms to your financial needs. Make sure the expense ratio you will be paying annually is not too high. I believe Vanguard’s funds are preferable for reasons mentioned above but there are plenty of choices out there to consider.

It might be wise to consult with your financial advisor or planner regarding your choices when it concerns target date funds for your retirement.

Related Post: How To Choose A Financial Advisor

Have you invested in a target date or life cycle fund for 529 savings or retirement accounts? What kind of experience have you had?

 

 

 

 

 

 

 

 

 

The Relationship Between Time, Money And Productivity

The Relationship Between Time, Money And Productivity

“Lost time is never found again.” Benjamin Franklin

 “Time is money,” but they have differences in our minds.

Asking someone, “How did you spend your time today?” is acceptable, while “How did you spend your money today?” is not. There are some exceptions, like on Amazon Prime Day.

Money and time are resources, but as time is finite, it is a more valuable resource. We can make more money, although we all differ in our abilities to do so. We can’t purchase money, but we may buy other people’s time for various services (e.g., help with doing household chores) to have more time to do other things we need to do.

There is income inequality, but we live by the same 24 hour day clock like everyone else.

While you think that those with an abundance of money can buy enough services to support them to free up time, that may not be so. An economist Daniel Hamermesh points out that the wealthy have time stress. In his book, “Spending Time: The Valuable Resource,” Hamermesh says higher earners work more because they feel rushed to make and spend money.

Time can be exchanged for money when we need others to listen to us, whether it is a life or business coach, psychologist, attorney, etc. How we spend our time with these professionals is up to us sometimes with little direction from them.

The Time And Money Relationship Is Visible In Our Financial Lives

1. Earning More

The time value of money is the notion that money can grow in value over a given period. When we deposit $100 cash into a savings account, we hope our money will grow according to the annual percentage yield (APY) of 2% and how often it compounds. The APY is the actual interest earned per year. We save more in the bank when interest rates are on the rise.

2. $5,000 today or $5,000 In Two Years

Given a choice between receiving $5,000 today or $5,000 in two years, you would likely choose $5,000 today. You can put the $5,000 to use now or invest it for more money. The only way those two amounts are valued equally is if you left the $5,000 in zero rate account today for two years.

3. Eighth Wonder of The World

Compound interest is one of the most powerful investing forces and fuels the urgency to set aside money early for your retirement. It simply means the addition of interest to the sum of a loan or deposit, or interest on interest. Your balance grows at an increasing rate. The compounding power plays an essential role in money in your personal savings plan, 529 Savings Plan, mortgages, and investment accounts.

4. Lump-Sum Or Annual Payments

Lottery winners, after the rush of adrenaline, have a choice to make regarding time and money. Most lotteries allow the winner to take a lump sum or an annuity. Most lottery winners will take the lump sum payment upfront. They want to have full access immediately rather than over several years.

Choosing the annuity may be better for tax implications than the lump sum. If you opt for sudden wealth, you may risk overspending. That is for another post, another day. We will get back to more examples of the time and money relationship.

5. Spend Time Working

 

Employers pay money for the time spent working at our jobs, whether hourly wages or annual salaries with overtime for longer hours.

6.Bond investing

When investing in bonds, you are technically lending money for a specific period to the issuer, who is the borrower. Most bonds pay a fixed amount of interest every six months to the investors and repay the face value. Over time moving towards its maturity, the bonds increase in value to become worth its face value.

7. Cars Depreciate In Value

Some of the financial value of what we purchase drops soon after our purchase, like cars. According to current depreciation rates and CARFAX, a new vehicle may drop by more than 20% after the first twelve months of ownership. Cars may lose as much as 10% of value in the first month.

8. You Cannot Replenish Time

Money is replaceable so long as you can continue to earn money by working, selling things, and investing. On the other hand, you can’t replace time. Renewable resources can be, but our time is gone.

9. Typical Lives Over Time

From birth through different life stages, we somewhat conform to doing certain things at about the same time. We are born, go through schools until college, age 22. Typically, we may begin our careers until we retire. The majority of us will retire after 60 years of age. In the years between our jobs, we have children, potentially divorce, and remarry again.

Please take a look at this great diagram that reflects our current civilization on one page. It is called the “Your Life In Weeks” post on the Wait but Why blog run by Tim Urban and Andrew Finn. Specifically, “The Life of A Typical American” highlights our journey in unison.

Time keeps moving by seconds, hours, and so on. Some of us are very productive with our time; some of us are more wasteful.

There is a line in “Unchained Melody” written by the Righteous Brothers:

“Time goes by so slowly and time can do so much…”

Time is finite; it is precious. Use it carefully. Let’s stop wasting our time and be more productive.

9 Tips For Being More Productive

 1. Make A Reasonable To-Do List

Having goals for work and home sometimes merge, mostly if you work at home. It is probably a good idea to separate those goals with different to-do lists. I sometimes work on my list at time late in the evening before relaxing. Planning what I need to do often helps me relax and sleep better. The next day I have more motivation and energy to tackle my tasks.

Make sure your list is reasonable, or you will abandon it altogether. Although we sometimes do the easier things first, at least it gets you moving. Move to your more significant priorities. Often there are conflicts between work and home so find the right balance.

2. Get Things Done

For those who are prone to putting things off, tomorrow is always a better day. There are downsides to delaying financial decisions like paying bills, saving, and investing. Procrastination is stressful and costly.

Instead, take small steps and get things done. It feels good to do so.

Related Post: 11 Ways To Avoid Costly Procrastination

3. Eat Healthy And Exercise

Having the right frame of mind is often helped by eating healthy, exercising, and remaining positive. Being fit helps to enjoy more of life longer. I have been eating far more healthy in recent years but should do more exercise.

I admit that I could do better with making more time for myself. I enjoy being outdoors, especially taking a long walk in our neighborhood. I am trying to carve out more time in the beautiful outdoors. I know this sounds like an excuse, but I recently spotted a bear and its cubs nearby. I have gotten more cautious about my evening walks and will be finding a new location.

I spend a lot of time teaching and writing and need move more. A fit and healthy body accompany a clear mind and increased stamina.

4. Reduce Screen Time

The average American spends more than 11 hours per day on their screens. However, not all of that time is wasteful. We watch shows, read, listen, play video games, and interact with others. Our phones, notably iPhones, come with screen-tracking, so it is easy for us to see how we spend our time with our devices.

On average, we spend nearly two hours on 5-6 social media platforms, including Facebook, Instagram, Twitter, Snapchat, YouTube, and Twitch. That equates to 5 years four months, just behind the seven years eight months we spend on watching TV according to Mediakix.

5. Learn A New Skill

Challenge yourself to learn new skills. Sometimes it is intimidating to learn something new at first. Learning can be frustrating and may raise some doubts in your mind. The harder the craft, however, the greater the reward. Just dive in and enjoy the experience.

Throughout my life, I have always looked to eliminate a weakness by learning something new. One of the significant demands of being an analyst is being a public speaker. I was never going to find success in my chosen career unless I tackled my fear and lack of skills.

I joined Toastmasters with a friend for about a year. It was an exhilarating experience! I am not a great speaker, but I came a long way since then. 

Instant Pot

I am a lifelong learner and will learn different things even as I am slow to adapt to new skills. Cooking is one area I thought beyond my reach, but thankfully, I have used videos to develop more abilities, although I am far from skilled. The Instant Pot is my weapon of choice for saving timing when cooking at home, which saves money.

So in a sense, time=money=instant pot!

To learn more about something that interests you, read books, watch YouTube videos, and take classes. My teens spend an awful lot of time being unproductive on their phones and Xbox.

I was pleasantly surprised last week when my son Tyler started speaking Chinese at the dinner table. He told us he found that he uses (www.Duolingo.com) at school to help him in Spanish. He started Chinese in recent months and now moving into Chinese characters, which he finds difficult. He enjoys it and recommends it for any language.

6. Stay Focused

I generally have a good attention span when I know what I need to accomplish. In the past, I was successful in tuning out everything around me. I studied for the law exams and bar primarily in Starbucks. I was motivated, and I had headphones. I turned them up.

When you have a lot of work to do, consider turning off your notifications. It is sometimes is a battle not to look at your phone to see how stocks are trading and what others are making for a joint dinner. You can catch up later. Stay focused.

7. Spend More Time With Friends and Family

My family is my best friend, and many of my friends are like family. I have very little family and only on my father’s side. My mom was the only survivor of a large family except for my uncle, who did not have children. So I often didn’t distinguish between family and friends.

Henry David Thoreau said, “The language of friendship is not words but meanings.” Spend time with meaningful people and they often become good friends. Make time to be with your friends part of your productive day. Lose those people who are negative sources of energy and don’t add much value.

In my fortunate experience, I have found the redeeming value of many friends, and so in that regard, I am wealthy.

8. Have A Shopping Plan

When you shop with a plan, you are more targeted about your needs and wants. I always make a list for grocery shopping. I also target what I items in each store I plan to visit rather than meander down aisles.

Without a list or a goal, you may succumb to impulsive shopping. Retailers want you to be impulsive about your spending. They want you to buy in the spur of the moment when you are feeling good and possibly with friends. If you tend to buy too many things on these trips, make sure you know the return policy. Consider leaving your credit cards home and using cash or go to be with your friends.

9. Avoid Comparison To Others

It is very natural for us to compare ourselves to others. It may instill inspiration in us to see our peers excel. However, most of the time, that is not the case. It is an innately human emotion to look at others from the time we recognize differences in our siblings and friends.

It takes time and energy away from us to make comparisons that are often unfair. It may also be robbing us of money when we spend money to catch up to our friends and what they have.

We are comparing the worst in ourselves to the best of others. You are unique with different experiences. Embrace yourself. You are better than you think.

Related Post: 9 Ways To Avoid Lifestyle Inflation

Final Thoughts

Time, money, and productivity are interrelated. It is up to us to try to accomplish more with the time we have. Time is precious. Let us use it wisely by structuring our free time better. Be conscious of when you are wasting time and seize that moment for getting a small task done. Read, learn, do stretches, or prepare a new recipe for your family.

Thank you for reading!

How do you become more productive? Please share what works for you. We would love to hear from you, and others can benefit from your thoughts!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pros and Cons of Self-Employment

Pros and Cons of Self-Employment

 

Have you considered becoming self-employed?

It is getting easier to start your own business given rapid technological advances, increased ability to buy your own health insurance through the Affordable Care Act, ability to outsource your needs, growth in the sharing economy and innovative financing choices.

There are noteworthy advantages to starting your own business such as being your own boss and having control, flexibility, work as hard as you want and own your successes. If you are a disciplined self-starter, have a vision and a plan you want to carry out, this may be a great path for you. The high risk/high reward opportunity is attractive.

The disadvantages are risks associated with potentially high upfront costs, a poor business plan, lack of provided benefits, taking care of taxes, raising money, need for support and the difficulties associated with handling the business.

We will go review the benefits and drawbacks of being self-employed but let’s define the term first.

What does being self-employed mean these days?

It generally is defined as working for oneself as a freelancer, independent contractor or the owner of a business rather than getting wages (and taxes withheld) from an employer. The exact definition of self-employment may vary between the Bureau of Labor Statistics (BLS) and IRS. As more people take on side jobs in addition to working for someone else, it is confusing as to how many people are truly self-employed.

How Many Self-Employed Workers Are There? It Depends

In 2015, the Bureau of Labor Statistics (BLS)  reported 15 million workers were self-employed, or 10.1% of the total US workforce. The BLS did a survey in May 2017 to estimate workers in contingent or alternative worker arrangements, or both. Government data sources have had difficulty counting the number of gig workers as they may be working at more than  one job.

Contingent workers are those who do not have an explicit or implicit contracts for continuing employment. These constituted an estimated 5.9 million workers in May 2017. Workers in alternative employment arrangements, include independent contractors, freelancers, independent consultants, on-call and temporary jobs amounted to 10.6 million workers but may also be included in contingent category.

The IRS says you are self employed if you carry on a trade or business as sole proprietor or as independent contractor, member of a partnership or otherwise in business for yourself, including part-time work.

Therefore, if you are generating supplemental income, it is taxable and you may be deemed self-employed. You are responsible for paying your own taxes. Some people are earning full-time wages from employers but may be earning part-time income as contractors or freelancers.

Numbers Vary By Study

The Fifth Annual  “Freelancing in America”  study by the Freelancer Union and Upwork was released in October 2018. It estimates  there were 56.7 million freelancers in what is touted as the most comprehensive study of the US independent workforce. They believe a majority of US workers will be freelancers by 2027.

MBO Partners recently released “2019 State of Independence in America” report. Their study showed 41 million independent Americans workings as consultants, solopreneurs, freelancers, contractors, temporary or on-call workers. I found their study reflects the reality of the current workplace with many workers adding supplemental income.

However, the number of workers that working as full-time independents by choice are roughly 12.4 million people. Of the nearly 29 million remaining independent workers:

  • 2.9 million workers are “Reluctant independents” meaning they are currently working independently but would have happily move onto someone else’s payroll if they find a traditional job;
  • 15 million workers are “Occasional Independents”  working at least one time per month as such, and
  • 10.8 million  workers are “Part-Time Independents” adding supplemental income from being a driver for Uber or Lyft.

Benefits of Being Self-Employed:

 

1. You Have More Control Over Your Life

It often gets frustrating to work for others. Your ideas are listened to but sometimes abandoned, your schedule is rigid with a lot of inefficiencies and you don’t see the upside potential you hoped for. We have all been there.

According to a TD Ameritrade Self-Employment survey, 76% of respondents had traditional employment before venturing out on their own.

Often a switch to working for yourself stems from a negative experience at your job. In an Intuit-Quickbook survey, 68% of respondents affirmed that they had an experience that pushed them to start working for themselves.

Having the ability to set your own goals, make your own decisions and carry them out can be exhilarating. You can work your own hours from home in sweatpants if you want.

Although working for yourself means you should be a self-starter, it doesn’t necessarily mean longer hours. Of those surveyed for Quickbooks-Intuit study on Work/ Life Balance,  38% worked shorter hours, 35% worked longer hours and the remainder worked similar hours as before.

2. Flexibility

True, many companies offer flex-time as a perk. Having your own business allows you to have maximum pliability over your schedule and how you work. As long you have access to the internet, you can work from anywhere. Starting a home-based business may be more cost-efficient with lower fixed costs. It can be a great option as long as you aren’t easily distracted.

Know when to take breaks and vacations and avoid burn-out. My parents had a family-run retail business. They didn’t have the option of a website. No one would have distinguished their store as a “brick and mortar” then. Their shop was open 7 days a week except for a handful of days off for national holidays. It was a rigid schedule for them.

With technology, you are only limited by your desire to make money as you don’t have a guaranteed paycheck.

3. Improved Work/Life Balance

Surveys have shown that having extra time for you and your family is a great benefit of being self-employed. Depending on your choice of business you may eliminate a long commute, travel to meetings, the need for more formal clothing and unwanted meals out with clients.

Having a better balance should reduce some of the work stresses of a traditional job. Those who are self-employed often say they experience greater satisfaction and a higher quality of life working for themselves for these reasons.

4. Higher Earnings Potential

Initially, you will have start-up costs to absorb on low revenues, if any sales at all. Longer term, your outlook is more promising. According to ZipRecruiter, the national salary average for self employed workers is $88,400/year as of July 2019. Freshbooks reports that 24% of survey participants earned over $100,000.

The US Small Business Administration (SBA) reports that on average, self-employed earn higher incomes than employees. Keep in mind that at least at the start there may be a long learning curve before you break even and generate positive earnings.

It is important for those who are self-employed to make sure to do their own proper accounting of revenues and costs. There are software packages for accounting, budgeting, expense tracker, billing, invoicing system and  tax preparation.

5. Tax Deductions For Your Business

You are required to file taxes annually and pay estimated taxes on a quarterly basis and pay the self-employment tax.

As a self-employed owner, you are entitled to deduct certain expenses. However, the recent 2017 Tax Cuts and Jobs Act eliminated some of those deductions. You can still deduct costs associated with your home office, use of a car for business, meals and health insurance premiums. You should review the specific IRS rules and consult with a tax professional.

Most importantly, you need to keep stellar records of your costs related to your business.

Home Office Costs

Deductions for your home office costs are among the more complex rules. You may deduct workspace costs you use regularly and exclusively for your business. Determine your office space at home by measuring specific square footage allocated for your business’s purpose.

Other costs associated with your home office may provide tax benefits are proportionate to your space are: mortgage interest, homeowners insurance, property taxes and utilities

There are two methods you can choose: standard method and simplified method. The standard option can be a pain as you have to diligently calculate your costs on an allocated basis. On the other hand, the simplified method is easier but may be capped in terms of home space used.

The costs associated with your workspace in your home that may be deductible are the office portions related to your mortgage interest, property taxes, insurance, and maintenance. Business communications expenses  like phone bills, internet and faxing may also be deductible.

Health Insurance Premiums

If you purchase your own health insurance and cannot be part of your spouse’s plan provided by his or her employer, you may deduct premiums for vision, dental, health and long term care.

Business Meals, Cars, and Overnight Travel

You may deduct 50% of business-related meals based on receipts or records you keep. Travel-related expenses may be deductible if overnight for specific business activites.  Your travel must be away from your home base. Keep good records of your purposeful trip as meals, car rentals or Uber may be deductible.

Car costs associated with business use are tax deductible overall.

Employer-Related Part of Self-Employment Tax

If you are paying the self-employment tax, you may be able deduct part of the FICA taxes that cover Medicare and Social Security that is the employer-related.

6. Retirement Planning

As you are accountable for doing your own taxes, you are also responsible for your retirement planning. You won’t be entitled to an employer match as you are now self-employed. On the positive side, you may have the ability to contribution higher tax-deferred dollars to your plan.

You have a few good options:

Traditional IRA or Roth IRA

These are the simplest plans you can set up yourself but they also have the lowest contribution limits. Contributions are up to $6,000 in 2019, up to $7000 as a catch up contribution for those 50 and above. There is a tax deduction for the traditional IRA and no immediate deduction for Roth IRA.

If you contributed to your IRA plan in your previous job, you can roll over the plans.

Solo 401K

This plan is for a business owner or self-employed person with no other employees, except your spouse. The solo 401K plan has a special benefit as the participants are both employer and employee. This means the self-employed person is able to contribute in two ways. as “employee” you can contribute $19,000 in 2019, or $25,000, or $6,000 more, if you are 50 years or older.

Then as “employer,” you can make a contribution of up to 25% of your compensation each year, up to a maximum of $56,000 in 2019 on an annual basis. If you are 50 years or older, your combined employee and employer annual contributions can’t exceed $62,000 as of 2019.

Owner’s spouse may also be able to make contributions if he or she is working for the business, thereby potentially doubling the  contribution.

SEP IRA

The Simplified Employee Pension or SEP IRA is good for business owners or self-employed with no or few employees. Annual contributions must be set at the same percentage of compensation for all employees, including the business owner. Annual contributions are limited to $56,000 as of 2019. Employee contributions are treated as a business expense.

There is no Roth IRA option.

SIMPLE IRA

Savings Incentive Match For Employees or SIMPLE IRA plan is for larger businesses with up to 100 employees. Contribution limits are up to $13,000 in 2019, with an additional $3,000 in the employee is age 50 or older. These amounts are a deductible expense but distributions in retirement are taxed. Employers must make some kind of contribution annually so this is a less flexible plan.

Defined Benefit Plan or Pension

This plan is best for a self-employed with no employees. It is more complex and generally an option when the business has a high income and wants to save a lot for retirement on an ongoing basis. Contributions are calculated by an actuary using the business owner’s age, expected return on investment and expected annual benefit.

The maximum annual retirement benefit is at $225,000 and is tax deductible generally.

There are many options that provide greater contribution limits to the self-employed person.

Drawbacks of Being Self-Employed

 

1. Sole Proprietor (SP)

Most small business owners may set themselves up in the form of sole proprietorship. Although SPs have some benefits, you may be exposed to personal liability. This means if you are sued and lose the case, your personal assets like your car and house could be taken to settle a case. Being an sole proprietor carries higher risk than other forms like incorporation or an LLC.

2. You Are On Your Own

You are probably going handle a lot of the business aspects on your own. Consider outsourcing at least some of the functions. Many people have a strong vision, motivation, hard work ethic, are decisive and have strong skills.

However, you are running a business on your own. Your management abilities will be just as important, if not more so. You need to deal with a lot more than when you were working for an employer.

When you are not yet generating much in the way of revenues, seeing losses pile up can be unnerving and stressful. You may also feel isolated at times. Make sure to make contacts, find mentors who could be helpful, join associations and network with people important to your business or are in similar situations.

3. Unpredictable Income

Depending on the type of business you are running, you may always be subject to sporadic earnings unless you have a subscriber business. At a minimum, you need to create a budget for your business, understand your revenue inflows, fixed expenses and variable expenses. Track your costs for potential reduction opportunities.

More than one-third of US households experienced a 25% change in income year-to-year according to Pew Research.

Make sure that you pay yourself a salary and save as much as possible for those times your monthly income is lower. You need to have an ample emergency fund for six months or more to pay for your living expenses. Arguably, your emergency fund should be for as much as a full year if your earnings are volatile.  You do not want to borrow money to pay your basic expenses.

In the TD Ameritrade survey of self-employed people, 59% say they are more anxious about earning a steady income.

Related Post: Why You Need An Emergency Fund (And How To Invest It)

 

4. Raising Money For Your Business

It is harder to get loans as a new business owner in its start-up phase. While you may have had a proven track record at your previous employer, banks will be looking at you in a new light. They will review your business plan, your budget and balance sheet. Importantly, they will be reviewing your credit report and credit score in great detail.

Before you even form your business, it is important to review your credit report for possible errors. Fix them ahead of approaching  the lenders for a loan. There may be hits to your credit report that you can explain.

Most importantly, you need to prepare for the possibility of needing funds in the future for a variety of reasons. It could be that you underestimated the costs of your business, you want to seize an opportunity that has presented itself or demand is growing faster than anticipated. According to the SBA, 50% of small businesses fail within the first five years.

Insufficient capital is often one of the major reasons that some businesses fail.

Many self-employed take financial risks to start their business with 27% relying on personal borrowing. Very few look to small business loans/credits (8%) or even federal loans or grants(2%) which may be available to them. It is worth checking the Small Business Administration’s (SBA’s) website to see if you qualify for a low cost loan or grant.

Innovative financing is available to you to pursue. Consider crowdfunding as a financing source that works for small business owners, particularly women.

Related Post: Challenges Women Entrepreneurs Face (And Overcome)

5. No More Company Benefits

Being self-employed hits you with the realization that you no longer have paid benefits you may have enjoyed at your previous employer. You still need to have access to some of the key benefits and purchase them on your own.

Thanks to the Affordable Care Act, you may be able to buy cheaper health insurance. Health plans can be obtained by HealthCare.gov though they may expensive. Positively, you can deduct the premiums for you and your dependents. If you are a freelancer, you can join the Freelancer’s Union for free. You can purchase different types of insurance and retirement plans as a member.

With respect to all kinds of insurance–dental,vision and disability–you can try a few places. Freelancers Union may provide some of these benefits.

Some benefits are less replaceable like paid leave or vacation pay. It will up to you to take off regularly. It is important for you and your family.

Conclusion

The benefits of being self-employed outweigh its drawbacks for many people. The key is knowing if it is right for you. Hating your job and your boss is not necessarily a sign of your potential success in starting your own business. Changing jobs first may the better decision.

Having your own business is a high risk/ high reward decision to make. Some people have begun their own business as a part-time side job, retaining their full-time job as a way of trying out the business. Others have gone out on their own after a considerable amount of planning and saving.

Essential Characteristics For A  Self-Employed Person:

  • Self-starter
  • Not A 9-5 person
  • Lifelong learner
  • Determined and have been obsessively planning
  • Have many skills, including communicating with others and  problem-solving
  • Need good financial habits, financially prepared and disciplined
  • Strong work ethic and ethical
  • Can be patient

 

Being on your own is a big decision to make. Talk to others, especially your family. At the very least, listen to your inner self. The answer is there.

Are you self-employed or considering such a move?  Wishing you the best in the decision and realizing success. Please share with us any thoughts or comments you have. We would like to hear from you!

We Invite You To Join Our Free Email Course For Personal Finance Lessons:

Pros And Cons of Being Self-Employment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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