Recession-Proof Stocks: 13 Stocks To Buy To Weather The Storm

Recession-Proof Stocks: 13 Stocks To Buy To Weather The Storm

Are you worried about a recession destroying your portfolio? In times of turmoil, people worry about their investments, money, and their financial futures. In times of trouble like these, some companies can bring about stability. These companies are part of a group of recession-proof stocks to help you ride out the rockiness of the recession.

Recessions happen within the market. The last one was during the Covid-19 pandemic that hit in March of 2020. In the 2000s, we have faced three different recessions, and each one comes with challenges, so make sure you are prepared for a downturn.

Industries That Do Well in Recessions:

Recessions tend to bring uncertainty to most investors. They do not know when they will end or when they will start.

With much loss of jobs, people go to buying much cheaper things. So the industries that will do well are more affordable retail markets that sell consumer staples or even those discount retailers.

DIY projects are something that starts to get done more often. People realize with money tight. It is easier for them to save by doing home improvement projects themselves. So people start shopping at home repair shops and DIY places like Lowes.

Then, the industries will never fail, like the regular around-the-house personal products that everyone uses, from toothpaste to cleaning products.

The emergence of e-commerce has helped many industries thrive during the Covid-19 pandemic, with is something to consider with companies.

With these industries in mind, here is a list of 13 recession-proof stocks that will keep going.

13 Recession-Proof Stocks:

1. Walmart (WMT)

Walmart is that company everyone knows about it. They have low prices and everything people may want in the world. Walmart is part of the elite Dividend Aristocrats, a group that consists of companies known for strong growth and reliable income.

When a recession hits, Walmart tends to do better. This is because their prices are low and therefore people would prefer to shop there. It saves them money, and they leave happy to be on a budget.

After the 2008 recession, Walmart did not have much of an online presence. So they started to gear up their e-commerce. Then, during the pandemic, they could capitalize on the work they had put into their e-commerce. As a result, their online sales grew more than 79% in the fiscal year of 2021, which ended on January 29th.

During the crash in March, Walmart’s stock price only dropped 6%. Since the bottom of the crash, it has risen over 27%.

The next great thing about Walmart is that they continually have dividend growth over the years. They have increased their dividends for 48 years in a row. So if you are looking for a stock that will stay strong in any recession, it is WMT. They will pay a dividend, and people will continue to shop there.

2. Target (TGT)

We just talked about the meager prices of Walmart, and now it is time to talk about Target. Target is that more excellent version of Walmart. The staff is kind, the prices are reasonable, and you have a better feeling of shopping here.

Target, like Walmart, beat the recession of 2008, and now they have put in the work into their online presence as well. They invested in their online sales. The First 3 Quarters of 2020 rose 10.8%, 24.3%, and 20.7%, respectably.

The S&P 500 fell around 31% in March of 2020, but Target only fell 28%. Since that bottom, Target has risen 151%. People need things, and they want to shop at target. This is an excellent recession-proof stock that will do well in the long run.

Since 1972, Target has increased its dividend every year. That brings about a lot of safety and reassurance to the shareholders. With such a long tradition with a dividend, the shareholders know that their money is safe holding some Target stock.

3. Pepsi Co. (PEP)

We often hear about Coke Cola, but Pepsi Co. has set up to do well in a recession. When people do not have as much money, they will cut back on many things. Buying soft drinks is probably one of them. However, Pepsi Co. is not just a soft drink company. They also own Fritos/Lays that gives them a more considerable margin.

During the pandemic, one item that took off was cocktail mixers. As people were stuck at home, they no longer could go to bars. So the cocktail mixers sold by Pepsi Co. rose by 36% in 2020 alone.

As a shareholder, you will also be pleased to know that Pepsi Co. has consistently raised its dividend. From 2008-2010 they had an average growth of 6%, which allowed them to increase their dividends by 11.3% from 2007-2011.

4. Lowes (LOW)

Due to recessions, people are more likely to start doing more DIY projects at home. This gives big box stores and hardware stores more business. Lowes is a company that people began to flock to for doing home improvement projects.

The pandemic caused many people to be stuck at home. As a result, home projects increased for households. The revenue for Lowes rose 23.5% in the first nine months of 2020. In the 4th Quarter of 2020, online sales boomed by 106%.

Shareholders will be happy with their dividends as well. Lowes being a Dividend Aristocrat, continues to increase its dividend every year for the last 32 years.

5. McDonald’s (MCD)

With less money in people’s pockets, they stop going out to eat. At this point, people are to look for cheaper options like McDonald’s.

In 2008, McDonald’s opened up 600 new restaurants. As a result, the sales of their products were higher in 2008 than they were in 2006 and 2007. This makes them a great company to hold to when things get nasty in the economy.

As a shareholder, you will know that their dividend has continued to increase every year for the last 32 years.

6. Rollins (ROL)

Rollins is a company that does pesticides. You have probably heard of Orkin, which is part of the Rollins Corporation.

In two decades, Rollins has had uninterrupted growth. They are now the largest pesticide company in the U.S. and possibly the largest in the world. Rollins owns 20% of the pesticide market in the U.S.

The great thing about this company is that it has cash flow. With little to no debt, if there were a downturn, they would have the cash to continue to withstand any recession. This cash can also help them to optimize and continue to grow and expand. Their growth continues.

Recession-proof stocks are the ones that will not go away. So Rollins may be around for a long time.

7. Hormel Foods

Hormel Foods is a great company that is always trying to invest and create. They have no debt to their name. While other companies are swamped in debt, Hormel has enough cash to withstand any downturn.

Their R&D department is always looking for ways to diversify. For example, they are a protein company. So they will make fake meat, plant-based meat, and any other type of protein.

Half of the stock is owned by Hormel Foundation. They work on trying to continue to grow their income and dividend each year. It provides more money for their charity that works with cancer research. This is an excellent thing for the company because it brings value and wants to be optimized with worthy goals to help people. You will love to add that dividend to your portfolio.

8. Costco

You will get more for your money buying things in bulk at Costco.

Sales grew by 9% in 2020. Operating income increased by 19% in 2020. As 2021 comes in, their growth has continued to rise. In May, they reported a 22% growth year on year on sales. As the country opens up, customers are starting to flood the stores.

Ecommerce is bringing about a massive surge in their sales numbers as well. 38% of their sales are coming from their online presence. It has grown 66% over the past year.

Their stock price only fell 8% during the crash. Since the bottom of the market, they have grown up over 35%. Costco is certainly a stock you should look at for being recession-proof. People will continue to try to save money and buy in bulk. Costco has been working on its online presence to help them in the long run.

9. Nike (NKE)

Nike is a store that goes by the motto “Just Do It!” This is what they did while another recession hit last year. They played offense instead of defense and doubled down on their strategy of increasing their online market.

Sales in the last year soared 141% in North America alone. Moreover, their revenue has gone up 96% since a year ago.

Sales were bolstering their sales in China during the pandemic, but as the pandemic has subsided, all the other markets have opened up. So they are making sales everywhere. They made moves to be more global, and those bets are paying off.

This is a stock that has stayed consistent throughout the pandemic, and the moves the company has made have paid off in the long run.

10. Procter & Gamble (PG)

Procter & Gamble is a Dividend King. They have raised their dividend each year for 64 years straight. So it is a company that has been around for 183 years.

When a Bull market is roaring, most people are going after all the growth stocks, but these blue-chip dividend stocks come out shining as a recession hits. This is Procter & Gamble.

They make the products we will use every day like Head and Shoulders, Crest toothpaste, Tampax, and many other everyday products.

This is considered a “dream” for dividend investors. They consistently have the cash flow to continue to increase dividends. The consistency of 64 years in a row is remarkable. You can buy the stock, forget about it, and let compound interest do its magic on it.

11. AutoZone (AZO)

AutoZone is a safe defensive stock that you can get into during recessions. When people try to spend less, they will buy fewer cars, which means people will spend more money fixing their vehicles.

In the last ten years, Autozone has grown. They have opened up about 200 new stores and expanding into Mexico and Brazil. It is the largest auto parts store in the U.S.A.

As an investor, you may want to know what they do with all their cash. They work on stock buybacks to help out their shareholders. As a result, their P/E is less than their competitors, which is a good thing.

12. Lockheed Martin (LMT)

As a defense contractor, you will not see Lockheed Martin disappear. On the contrary, during each recession, the defense budget has increased over time. With increased spendings means more revenue for companies like Lockheed Martin.

70% of their business comes from the U.S. government. As tensions with other countries start to happen, then business starts to roll.

It has been trading at about 17x his earnings average, slightly above the S&P500 average, which has a dividend that grows every year. Revenues grew through the 2008/2009 financial crisis and the Covid-19 recession.

LMT has grown its dividend by 10.39% annualized for the last 5 years for those dividend investors. The cash is excellent, and the world is not yet a peaceful ending, so this stock should hold firm for many years to come.

13. Amazon (AMZN)

One of the best recession-proof stocks is Amazon. I know Amazon is a massive company, but it has survived three recessions and came out on top as well. As recessions happen, Amazon thinks about ways to do things better. With significant diversification in cash flow, Amazon has set itself up to withstand any recession.

Loyalty is enormous with Amazon. It has been seen with the prime membership that retention rates of one year are 93%. For accounts that have prime for more than two years, the retention rate is closer to 98%.

In economic downturns, people start to cut things out of their life like cable tv. If you are already a Prime member, you have access to Amazon prime video giving you access to TV and movies without paying extra for cable.

As an investor, you must look at what happens in economic downturns. If growth were to stall for Amazon, they would have enough cash flow and options from their diversification to keep them afloat in any recession.

Final Thoughts

Recessions will continue to happen in our lifetime. I have seen the Boom, the Great Recession, and even the tiny Recession of 2020. When recessions happen, people are left with less money. So they start living more stingy. With their money, they get more defensive, and at that point, you need to look at companies that will be uninterrupted by the lack of spending power someone has.

Big companies that sell cheaper everyday items will come out ahead like the Walmarts and Targets of the world. People will always need to buy everyday items.

Those companies with a significant online presence can take advantage of people not wanting to go out shopping. If companies have invested in this like Nike and Costco, then they have opportunities to capitalize.

Look at companies with excellent cash flow as well. For example, Hormel foods and Rollins has excellent cash flow, which allows them not to be dictated by debt, and gives them a cushion for market downturns. These companies will be the ones that rise from the ashes when everything is done.

These are just 13 different companies that have an excellent reputation. Do some additional research to figure out what is best for your situation. You cannot go wrong with any of these stocks.

This post originally appeared on Your Money Geek.

Thank you for reading! Visit us at The Cents of Money for articles of interest.

Best 43 Quotes On This Independence Day

Best 43 Quotes On This Independence Day

Originally published on July 2, 2019, updated on June 30, 2021.

The Fourth of July is approaching, with images of fireworks, hot dogs, hamburgers, and apple pie. It is a favorite time in our household, sans the apple pie as my husband is allergic to apples. Last year was very different. Fireworks were silent due to social distancing associated with the coronavirus pandemic. Thanks to vaccinations, we are free to celebtate once again Typical events like baseball, concerts, and family reunions are back this year.

Our Fault Lines Are Very Visible And Needs Fixing

This time of year is a particularly good time to be proud of being an American despite our country’s faults. When you are raised by immigrants who loved their chosen country, freedom, security, and independence were always privileges. My mom valued being a citizen in America in her adopted country and fiercely taught me about financial freedom and independence, especially for women. 

However, fault lines have widened as realizations have sunk in that racial inequalities have not narrowed as hoped. in fact, they are reemerging and threatening our union. Peaceful protests are giving voice to needed change.

To help celebrate Independence Day this year, and every year (why not every day?) I am sharing some of my favorite quotes. You may notice that many of these quotes are apt for financial freedom and financial independence. So I took the liberty of sharing those as well. I have added new quotes to represent those who need to be heard.

Freedom and independence mean different things to different people. Today, and forever, our country needs to fix our faults. If we are to have another 244 years, we need to wipe out all our inequalities. Then we can say we are truly free as one.

America, The Beautiful

“It will be celebrated with pomp and parade, bonfires and illuminations from one end of the continent to the other.” –John Adams, Second US President

“Liberty, when it begins to take root, is a plant of rapid growth.” –George Washington

“How important it is for us to recognize and celebrate our heroes and she-roes.”  -Maya Angelou, poet and activist


“Where liberty dwells, there is my country.” – Benjamin Franklin

“May the sun in his course visit no land more free, more happy, more lovely, than this our own country!” – Daniel Webster

“There can be no true home without liberty.” – Harriet Beecher Stowe


“America means opportunity, freedom, power.” – Ralph Waldo Emerson

“It does not take a majority to prevail, but rather an irate, tireless minority.” – Samuel Adams

“America…it is the only place where miracles not only happen, but where they happen only the time.” –Thomas Wolfe, Of Time and the River, 1935 

“The essence of America-that what really unites us–is not ethnicity, or nationality, or religion. It is an idea–and what an idea it is: that you can come from humble circumstances and do great things. That it doesn’t matter where you came from, but where you are going.” – Condoleezza Rice, Republican National Convention, 2012

Let Freedom Ring!

“Those who expect to reap the blessings of freedom must undergo the fatigue of supporting it.” – Thomas Paine

“In the truest sense, freedom cannot be bestowed; it must be achieved.” Franklin Delano Roosevelt

“For what avail the plough or sail or land or life if freedom fail?” – Ralph Waldo Emerson

“All we have of freedom, all we use or know, This our fathers brought for us long long ago”. – Rudyard Kipling

“Freedom lies in being bold.” – Robert Frost

“Freedom (n.): To ask nothing. To expect nothing. To depend on nothing.” – Ayn Rand

“We must be free not because we claim freedom, but because we practice it.” – William Faulkner


“Education is the door to freedom.” – Oprah

“Lock up your libraries, if you like; but there is no gate, no lock, no bolt that you can set upon the freedom of my mind.” – Virginia Woolf, A Room of One’s Own

“Freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.” – Martin Luther King, Jr.

“Freeing yourself was one thing, claiming ownership of that freed self was another”. – Toni Morrison

“Freedom is not worth having if it does not include the freedom to make mistakes.” – Mathatma Gandhi

“Freedom’s just another word for nothing left to lose.” Janis Joplin, Me and Bobbie McGee

“For to be free is not merely to cast off one’s chains, but to live in a way that respects and enhances the freedom of others.” Nelson Mandela

“He who has overcome his fear will truly be free.” Aristotle

Our Basic Rights

“Liberties aren’t given, they are taken.” – Aldous Huxley

“It is by the goodness of God that in our country we have three unspeakable precious things: freedom of speech, freedom of conscience, and the prudence never to practice either of them.” – Mark Twain

“If I follow the inclination of my nature, it is this: beggar-woman and single, far rather than queen and married.” – Elizabeth I, Collected Works 


“I do not wish them [women] to have power over men; but over themselves.” – Mary Wollstonecraft

“My own sex, I hope will excuse me, if I treat them like rational creatures, instead of flattering their fascinating graces, and viewing them as if they were in a state of perpetual childhood, unable to stand alone.” – Mary Wollstonecraft, A Vindication of the Rights of Women

“I’ll walk where my own nature would be leading, it vexes me to choose another guide.” – Charlotte Bronte, Jane Eyre

“People have only as much liberty as they have intelligence to want and the courage to take.” – Emma Goldman

“I think the girl who is able to earn her own living and pay her own way should be as happy as anybody on earth. The sense of independence and security is very sweet.” Susan B. Anthony 

Financial Freedom and  Independence

“The highest pleasure to be got of freedom and having nothing to do, is labor.” – Mark Twain

“Everything that is really great and inspiring is created by the individual who can labor in freedom.” – Albert Einstein

“For it is in your power to retire into yourself whenever you choose.”  – Marcus Aurelius, Meditations

Erasing Inequalities For Once And For All

“To bring about change, you must not be afraid to take the first step. We will fail when we fail to try.” Rosa Parks

“Prejudice is a burden that confuses the past, threatens the future, and renders the present inaccessible.” Maya Angelou

“Without a struggle, there can be no progress.” Frederick Douglass

“There is no such thing as race. None. There is a human race–scientifically, anthropological.” – Toni Morrison

“Not everything that is faced can be changed, but nothing can be changed until it is faced.” – James Baldwin

“To suppress free speech is a double wrong. It violated the rights of the hearer as well as those of the speaker.” – Frederick Douglass

“I see what’s possible when we recognize that we are one American family, all deserving of equal treatment.” – Barack Obama


“Let not your mind run on what you lack as much as on what you have already.” – Marcus Aurelius

“All good things are wild and free.” – Henry David Thoreau

“Men spend the best of part of their lives earning money in order to enjoy a questionable liberty during the least valuable part of it.” Henry David Thoreau

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” Warren Buffett

Related Post: Gratitude Can Lead To Better Finances


America’s Greatness

“It’s never paid to be against America. We come through things, but it is not always a smooth ride. Warren Buffett

“From a standing start 240 years ago–a span of time less than triple my days on earth– Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants and the rule of law to deliver abundance beyond any dreams of our forefathers.” Warren Buffett, 2016 Shareholder Letter to Berkshire Hathaway Shareholders

I have as big an obsession as Warren Buffett appears to have when it comes to prosperity and his gratitude to our country.

Thank you for reading! Do you have any favorite quotes on Independence Day? Please share them with us! Enjoy your holiday! Stay healthy!





















What You Need To Know About A Sinking Fund

What You Need To Know About A Sinking Fund

We all have something special we’d like to buy for our home or in life. That old couch that has seen better days in your living room begging for a replacement or a vacation you thought about for a long time but keep pushing off because it is too costly. Paying for these significant expenses can be challenging for us, but a sinking fund may pave a better way.

Sinking funds can be a gamechanger for individuals and households. It is a valuable tool to add to your financial toolbox for savings. This strategy helps those who want to manage their finances better and gain peace of mind.

The timing for setting up sinking funds could not be better. Americans have been saving more, as illustrated by the US personal savings rate of 14.9% for May 2021. The unusually high rate due to pandemic-related spending constraints compares to 7.6% at the end of 2019. So why not make your savings work better for you?  Setting up a sinking fund is easy to do and enhances your ability to save money for large purchases you will make in the future.

What Is A Sinking Fund?

Sinking funds have long been helpful for companies and bondholders to minimize risk. For example, when corporations need to raise capital, they may issue a bond that matures in 20 or 30 years. Bondholders receive coupons semiannually and the principal (their investment) at maturity.

Many bonds now have a sinking fund managed by a trustee who oversees the fund. Money is set aside periodically with a trustee for repayment of the portion of the principal. This action eliminates the need for a significant cash outlay for the company at maturity.

There is less risk of the company defaulting by using the fund if it doesn’t pay back the principal to bondholders. The fund adds protection and security for the bondholder that the company can pay off their debt. A sinking fund allows a company to raise capital with a lower interest rate to bond investors. As such, it improves a company’s creditworthiness.

A Sinking Fund For Your Household

Similarly, you or someone in your family can create a sinking fund, dedicating a savings account for a specific household expense that may be too large to handle without borrowing the money. We will explain later how your sinking fund differs from your emergency fund.

Once you determine what you want, say a new couch for $1,000-$1,500 for your living room, your sinking fund is for the sofa, not for another expense. You intend to save money to buy a couch, making monthly contributions to the “couch” sinking fund. Everyone has their budget, lifestyle, and timeframe for getting the couch or whatever it is you are targeting.

With a bit of planning, you can have what you need or want in your life without guilt. If you have your heart on a particular $1,500 couch within a year (i.e. 12 months), your monthly savings goal is to contribute $125 to the sinking fund each month.  Break the estimated spending amount into the monthly savings you plan to deposit into the respective savings account.

Without a fund, there is a greater temptation to pull out your credit cards for these large purchases. Your challenge is that you would have to pay your card balance in full or face a card balance growing on a compound basis at high-interest rates. There are more benefits to setting up a sinking fund for purchases than the downside of adding to your debt.

Sinking Fund Vs. Emergency Fund

Both your sinking fund and emergency fund are safety nets but for different purposes. An emergency fund is for the money you set aside in a savings account for unexpected costs you may face when losing a job, boiler breaks, a medical necessity, or pet surgery. Emergencies, by definition, are unknown as to timing and amount needed. You still have to pay bills, rent, or mortgage. Unplanned events happen, upsetting your finances. We recommend having your emergency fund cover six months of your basic living needs. You want to have access to liquid assets quickly.

The sinking fund is for saving money for a known purpose you expect to purchase in the future. Typically, your sinking fund is for a specific planned amount. You know its timing and have been saving for it. The point of having a sinking fund is not to tap your emergency money or a general savings account.

Just like you have loans for a house, car, and college, you are earmarking savings for larger items you want to purchase. Dollars are fungible and can go into a “car or house down payment” sinking fund. You can have a sinking fund by categories such as a house, car, vacations, Holidays, Christmas gifts, or charities. Alternatively, you can name these reserves by being more specific:

  • Kitchen remodeling
  • Sofa
  • Flat-screen TV
  • Refrigerator
  • Car maintenance and repairs
  • Down payment for Car
  • Down payment for House
  • Pet bills
  • Taxes
  • Vacations

Labeling the sinking funds is a personal decision based on your household and its relevant savings goals. 

How To Set Up Your Sinking Fund


1. Review Your Budget

Before setting up your sinking fund, you should a good grasp of your household’s budget. Budgeting is an essential tool for understanding your income sources less fixed and discretionary expense categories. Fixed living costs include your rent or mortgage, utilities, loan payments, and savings. You should have “savings” on your budget for when you are paying yourself first. Depending on how granular your budget is, you should separate line items for an emergency fund and the sinking fund. Pick a budget method that works for you.

When it comes to fixed costs,  you have less flexibility to reduce amounts. On the other hand, discretionary spending varies based on money left over.  You can learn more about different budgeting approaches here.

2. List Your Planned Purchases

Make a list of fund categories, break them down into more specific items. Then determine the target amounts for each. Name your sinking fund by its discreet type. Some funds may have higher amounts and longer timeframes. Divide each type total by the numbers from the planned purchase time. For example, if you are saving up for a new car’s down payment in two years, estimate the cost of the car is, say, $38,000, so you would want around a down payment of  $4,500. That equates to about $190 of the planned monthly contributions for two years or 24 months.

There is no set number of sinking funds though I would caution you about having too many sinking funds to manage.  This process is about organizing your finances to make things more effective and efficient for you. As in the sinking bond for businesses, you are the trustee or manager of the funds.

3. Where Your Savings Will Go For Purchases

You can open an FDIC-insured saving account for each type or have one large sinking fund with named sub-accounts. Keep in mind that the sinking funds are separate from your emergency fund and savings accounts. The type of accounts you should look for should be readily accessible and liquid, similar to the account you use for an emergency fund.

When you open a sinking fund for each type, each of your accounts differs from target amounts and timeframe. For example,  when you are saving money for a house makeover or a down payment for buying a home, you probably are looking to build a five-figure money chest. If so, you can look for higher-yield savings or a money market account. For smaller purchases and shorter timeframes, avoid accounts that require minimums that penalize you with fees for not maintaining a specific balance.  Essentially, you want safety and liquidity for the sinking funds.

Use Sub-Savings Accounts

Some banks, such as Ally, allow you to have a savings account and sub-savings accounts when you have multiple savings goals for concrete purchases.  You can automate transfers to each of your sinking funds based on varying monthly contributions. Having the ability to transfer money can ease the process for you. However, you will be receiving more monthly statements.  Consider the account details regarding fees, minimums, if APYs are different, and whether this works for you.

4. Need An FDIC-insured Account

Whatever you decide to do, each sinking fund should be in an FDIC-insured savings account that is readily accessible. For longer-term purchases, look for higher yields and minimize fees you may have to pay.

Benefits of A Sinking Fund


1. Better Budgeting

When you have a good understanding of your budget, your fixed living costs, it is easier to plan for discretionary spending. You can decide what amount you can contribute to your specific sinking fund each month without becoming a hardship.

The better your budgeting, the better you can plan for your savings goals and spending. It is easier to save money when you have an intended target to set money aside for that purpose.

2. Conscious Spending

When you set up your sinking fund, you essentially are planning to buy something you need or want for your home or life. It is an act of conscious or mindful spending when you are intentionally saving for something. You know the specific couch you will buy, have a plan, and focus your attention on that couch.

By taking time and doing comparison shopping, it is less stressful and more enjoyable anticipating the arrival of something new that you specifically want to get. You are not at that stage where salespeople will push you into an impulsive purchase you’ll regret. You are more in control of your spending and more likely to negotiate where and when possible.

3. Delays Instant Gratification

The need for instant gratification is all around us, with social media ads tinkering with our brains. The present bias plays a significant role in our leaning toward immediate pleasures. It causes us to favor the present over the future with immediate rewards. With effort, you can counter tendencies to overweight decisions that can cause overspending with planning.

With your sinking fund in place and growing closer to your spending goal, you can delay instant gratification. You have your mind not just on your expected purchase but on other things as well. Setting goals for one part of your life makes you more purposeful about your needs and wants. Achieving something on your list can be very fulfilling.

4. Avoids Adding Debt

Overspending can lead to higher debt, significantly rising credit card balances. Card balances are especially higher cost and challenging to handle. As in the sinking fund for corporate bonds, a household sinking fund can help us avoid reaching for our credit cards to pay for large ticket items. Increasing our monthly savings by earmarking money to contribute to a specific account that earns interest is the path to better financial health.

Saving first, spending later, and avoiding debt where we can, can improve our creditworthiness.

5. Peace of Mind

Having peace of mind is priceless. While you may not be able to get rid of every stress you have, planning out expenditures for important things you want to get or do can help your mindset.



1. Don’t Have Too Many Sinking Funds

You may get good at organizing your finances. The next thing you know, you have too many sinking funds, overlapping purposes. That reminds me of an ad for Post-It notes, stating that they should be used “for the little things you’ll forget,” and then you see yellow Post-Its all over people’s foreheads. You get the picture. You don’t want to create chaos. The sinking fund process should help to organize where your savings should go.

2. Sinking Funds Are Not Interchangeable

When creating sinking funds, they are separate from each other. Keep contributing to each based on the estimates you determined. Try to label them as discreetly as possible, so it is not confusing to you. If you wanted a couch and estimated $2,500 for it, but found the one you love for $1,800, then you can reallocate your savings to other areas. Sometimes you under or overestimate the expected cost, so make changes but don’t blur the lines.

3. Keep Emergency Funds Separate

Having an emergency fund is essential, and its purpose is different from any sinking fund. Don’t transfer funds from your emergency account to your vacation account. That’s cheating, and if an emergency arises, you want that fund to be there for you in its safe and sound place.

4. Don’t Forget Savings For Other Goals

Saving for retirement and investment accounts is vital for your long-term future. Make sure to automate contributions to your 401K retirement plan, if sponsored by your employer, and for your Roth IRA. You should contribute some of your savings to investments, whether you are managing the account or you have a financial adviser to do so.  Over the longer term, these accounts grow faster than savings bank accounts, depending on your respective investments (i.e., stocks, bonds, real estate), and benefit from compounding growth.

Final Thoughts

Establishing sinking funds by saving for large purchases can be beneficial. It is a terrific organizational tool that enhances your mindfulness. By being thoughtful about your spending, you will reduce your need for instant gratification while reducing your buyer’s remorse.

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Self-Discipline: Follow These 12 Steps To Make A Habit

Self-Discipline: Follow These 12 Steps To Make A Habit

Developing self-discipline isn’t easy. Procrastination is the enemy of self-discipline. Here’s a perfect example:

“I’m going to start the keto diet tomorrow because I want to lose 20 lbs for my wedding. I’m trying to be more disciplined about how I eat.”

Does that sound familiar? Most of us like to talk about how we’re going to work on our self-discipline regarding fitness and finances or just life in general. We all know that we should improve our self-discipline to get better results and get more done.

We don’t know where to start, and it’s easy to feel overwhelmed when developing self-discipline. That is why I wanted to address this topic today based on years of research and to try everything out personally.

How can you build self-discipline? Let’s look at 12 ways to develop self-discipline even if you’ve already tried everything.

People have accused me of being disciplined in the past. Often, I don’t know how to respond. Why? In my mind, I feel like there’s always more to get done. I’ve done my best to test out different ideas and try to create a disciplined life to get more done and save more money for what I want to do.

In this article, we’re going to look at what you need to know about self-discipline and the different ways that you can develop self-discipline right now, even if it feels like you’ve tried everything.

What You Need to Know About Self Discipline

Most information out there on self-discipline is just annoying and unrealistic. It’s easy to feel discouraged when advice surrounding self-discipline in a self-help book feels condescending.

In the perfect world, we would all wake up at five in the morning, meditate for 20 minutes, and then go through our day without any interruptions or temptations. In reality, this isn’t what happens at all. Life comes at us quickly. We start the day off with the best intentions and still waste time or not getting much done. We don’t always eat the best, nor do we get as much done as we should.

There are two things that you need to know about developing self-discipline:

  1. You’re not a bad person if you have cravings or are not constantly feeling disciplined. You’re not a robot, and that’s okay. Don’t let anyone on social media shame you for not being perfect.
  2. You can always work on your discipline. You don’t have to stay stuck at your current level. That is a skill that can be developed and worked on over time. Nobody’s born being 100% disciplined, just like nobody’s completely undisciplined.

Are you ready to get started?

12 Ways to Develop Self Discipline

I’ve put together the best tips that I could find, along with actionable quotes from books and authors that have helped me develop self-discipline over the years.

Here are 12 ways that you can develop self-discipline.

1. Set Small and Realistic Goals

Are you setting realistic goals? Have you thought about starting small to make some progress?

Too often do we fail to stay disciplined because we set unrealistically audacious goals. We don’t even know where to start or how to begin, so we end up doing nothing.

In the book “Essentialism” the following point is brought up on setting small goals:

“Instead of starting big and then flaring out with nothing to show for it other than time and energy wasted, to really get essential things done we need to start small and build momentum. Then we can use that momentum to work toward the next win, and the next one and so on until we have a significant breakthrough—and when we do, our progress will have become so frictionless and effortless that the breakthrough will seem like overnight success.”

The trick is to set small and realistic goals to not set yourself up for failure. Develop an abundance mindset to help you to achieve success.

2. Stop Trying to Do So Many Things at Once

Social media has convinced us that we need to be the hardest workers in the room who constantly work on various projects. That couldn’t be further from the truth. To develop self-discipline, you need to ruthlessly eliminate it from your life and figure out what you need to focus on.

In the classic book “The One Thing” Gary Keller brings up an excellent point on accomplishing your goals:

“It is not that we have too little time to do all the things we need to do, it is that we feel the need to do too many things in the time we have.”

Try to focus on one thing at a time so that your mind isn’t all over the place. It’s much easier to be disciplined when you’re only working on one important thing.

3. Change Your Environment

Did you know that your environment could be holding you back? There’s a reason so many people work out of coffee shops; or why CrossFit classes are such a hit.

According to James Clear in “Atomic Habits,” it’s more important to change your environment than it is to try to rely on will-power:

“The people with the best self-control are typically the ones who need to use it the least. It’s easier to practice self-restraint when you don’t have to use it very often. So, yes, perseverance, grit, and willpower are essential to success, but the way to improve these qualities is not by wishing you were a more disciplined person, but by creating a more disciplined environment.”

When you want to improve your self-discipline, consider changing the environment.

Here are a few examples of how you can make this happen:

  • Don’t keep a bag of chips on the table when you’re trying to lose weight.
  • Have a specific space for work so that you’re not trying to finish that article while you’re on the couch watching the evening news.
  • Hang around with people who are working on similar goals.

4. Make It Easy to Stay on Track

Whatever you do, try to set yourself up for success by making it easy to stay on track. The trick is to set everything up so that you don’t have to struggle to stay disciplined.

How can you make your goals easy?

  • Know yourself.
  • Work within your limits.
  • Focus on progress over perfection.

On that note…

5. Hold Yourself Accountable

Are you being held accountable? The truth is that most of us can’t stay disciplined on our own. We need people around us that will keep us accountable so that we have a responsibility to do what we said we would do.

How can you hold yourself accountable?

  • Hire a coach so that you’re financially committed.
  • Find co-workers/friends on a similar path.
  • Make your goals public.
  • Write your goals down everywhere.
  • Use a planner to track your progress.

It would help if you were held accountable to ensure that you’re going to follow through.

6. Know What You Want to Do

Too many of us set vague goals. We want to be healthy or wealthy. We wanted to be more disciplined, but we don’t know what that discipline looks like.

James Clear brought this up in the aforementioned “Atomic Habits” book on habit building:

“Many people think they lack motivation when what they really lack is clarity. It is not always obvious when and where to take action. Some people spend their entire lives waiting for the time to be right to make an improvement.”

Direction is much more important than speed.

Speaking of motivation…

7. Never Rely on Willpower or Motivation

Willpower is the last thing that you should rely on. You won’t always feel motivated. You won’t always feel like doing the right thing. The trick is to change your environment, hold yourself accountable, and set small goals so that you never have to worry about being motivated 24/7.

8. Ignore the Noise

There’s no easy way to say this. You have to avoid the noise. You have to find ways to ignore the noise to focus on what matters to you.

You can’t develop self-discipline if you allow any of the following to distract you:

  • Everything that’s happening on the news
  • Notifications from 8 different social media apps
  • Arguing with strangers on Facebook
  • Getting upset over every comment that you read

In the book “The Daily Stoic” this point is brought up on focus and attention:

“Think of all the interests vying for a share of your wallet or for a second of your attention. Food scientists are engineering products to exploit your taste buds. Silicon Valley engineers are designing applications as addictive as gambling. The media is manufacturing stories to provoke outrage and anger. These are just a small slice of the temptations and forces acting on us—distracting us and pulling us away from the things that truly matter.”

You’re going to get pulled in every direction. You have to do whatever you can to block out what doesn’t matter so that you can accomplish your goals.

9. Think of Why You’re Doing This

I’m not one of those corny motivational people. I want to remind you that it’s important to remember why you’re trying to accomplish that goal that requires you to develop self-discipline.

Here are a few things to consider:

  • You want to lose weight to be healthier so that you can live longer to meet your grandkids.
  • You want to pay off that debt so that you can finally quit your job.
  • You want to save up so that you can take your partner on that dream vacation.
  • You want to grow that side hustle so that you can follow your dream of being a writer.

That leads to the next point.

10. Find What You Enjoy Doing

Too many of us focus on goals that we don’t even care about.

“Everyone’s motivated at something. It just depends on the thing. Even the people that we say are unmotivated are suddenly really motivated when they’re playing video games. I think motivation is relative, so you just have to find the thing you’re into.” — Naval

You’ll develop more self-discipline when you focus on goals that interest you and keep you excited.

11. Celebrate Your Wins

Being disciplined isn’t just about saying no to everything. It’s okay to celebrate along the way. I’ll even say that celebrating small wins is essential to developing self-discipline for the long run. We all need to look forward to something.

12. Identify Obstacles That Are Holding You Back

You have to figure out what’s holding you back from being more disciplined. The goal is to eliminate your obstacles so that you can replace them with more productive activities.

This one quote opened my eyes to distractions and obstacles:

“Most people don’t want to acknowledge the uncomfortable truth that distraction is always an unhealthy escape from reality. How we deal with uncomfortable internal triggers determines whether we pursue healthful acts of traction or self-defeating distractions.” — Nir Eyal

When things aren’t going your way, you must take a step back to identify the barriers holding you back to know what you need to work on to develop self-discipline. Remember that success is the best revenge.

What if you find yourself still struggling with self-discipline?

It’s pretty much impossible always to feel motivated. You won’t always do the right thing, and you’re going to make plenty of mistakes. There’s nothing wrong with admitting that you’re human. The goal will always be for progress over perfection.

I turn to this excerpt from BJ Fogg on building tiny habits:

“Most people operate under the assumption that they’ve got to go big or go home. They think that in order to kick a bad habit, destress, or make a pile of money they’ve got to do something radical. Go cold turkey. Sell their house and move to the beach. Put all their chips on the table. Go all in. Those who take these extreme measures and succeed are lionized.

If you’ve ever watched a special about an Olympic athlete who’s been training twelve hours a day since she was three or a successful businessperson who sold everything and moved to Italy to find true happiness, you know what I’m talking about. There’s nothing wrong with taking bold action. Life and happiness occasionally demand it. But remember that you hear about people making big changes because this is the exception, not the rule. Narrative drama comes from bold action, not from the incremental progress that leads to sustainable success.”

The key message to remember is that it’s important to focus on the next small task in front of you instead of worrying about 20 different things that you have to do. You won’t develop self-discipline overnight. That will take some time and effort.

Good luck with developing more self-discipline. Don’t forget to enjoy the ride.

This article originally appeared on Your Money Geek and has been republished with permission.

Thank you for reading! Please visit us at The Cents of for articles of interest you will enjoy!

How to Choose A Financial Advisor

How to Choose A Financial Advisor

“A goal without a plan is just a wish.” 

Antoine de Saint-Exupery, The Little Prince


“When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps.” 


When you are seeking a financial professional, you may be confused by your choices. Many professionals help you with planning when giving you financial advice, whether making investment recommendations for your portfolio or providing tax-efficient savings.

“Financial planner” or “financial advisor” are terms often used interchangeably. They may provide similar financial planning services. However, their level of education, certifications, designations, and standards may be quite different. This post discusses how to choose a financial advisor that is right for you.

The Main Differences When Seeking A Financial Advisor


1. Type of Personal Financial Services You Are Looking For

You may be looking for someone to advise you for a single purpose like debt management or a comprehensive plan. Here, we will focus on how to choose a financial advisor or planner. This type of advisor can handle various services (discussed below) to guide you towards your goals strategically. At the end of this article, you should be able to hire a financial advisor.

You may turn to accountants and attorneys for setting up a new business, debt management, bankruptcy, taxes, and estate planning.

2. The Fee Structure

Generally, your fees range from the fee-based only, commission-based, flat fee, or a blend of fees and commissions. However, there may be extra costs for additional services such as insurance.

3. Education, Certification, and Designation Requirements Vary

Financial advisors or planners have a bachelor’s degree with an accounting or finance focus as the minimum requirement. Advanced educational degrees are not uncommon. Their course of study distinguishes certified financial planners (CFPs), with a rigorous exam, required experience, and high standards.

Consider your candidate’s soft skills such as adaptability, communication, and problem-solving and if you have good chemistry. We have a list of questions below you should ask your candidate when choosing your financial advisor.

 4. How They Are Regulated

Different regulators play a role according to the primary designation. Regulation of financial planners may be according to their professional title. Planners with CFP credentials are subject to the requirements of the Certified Financial Board of Standards.

The Securities Exchange Commission (SEC) and the state where they do business regulates investment advisors who provide financial planning.

The  State Board of Accountancy regulates the accountant preparing a financial plan.

Key Financial Services


1. Money and Debt Management

Consider a money coach or credit counselor when you need help saving money, setting up a budget, reducing expenses, and debt management. You can often get free assistance from a certified credit counselor by searching on the website.

Accredited financial counselors or AFCs can aid you in money management through their organization 


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

2. Investment Advice and Trades

Investment advisers and brokers provide all manner of investment services, from do-it-yourself online trading to full-scale investment advice and money management. Generally, investment advisors and broker-dealers need to register with the SEC and the Financial Industry Regulatory Authority (FINRA), and state regulators. They are subject to the suitability standard, less demanding than the fiduciary duty.

A Registered Investment Advisor (RIA) advises high-net-worth individuals on their investments and manages their portfolios. They have a fiduciary duty to their clients, which means they provide investment advice by acting in their clients’ best interests.

3. Financial Planning

Financial planners are financial advisors who provide clients with a range of personal financial services. They can help you create a simple one-time financial plan if you are just starting, grapple with a specific financial objective, or provide a comprehensive goal-based plan. The latter may encompass savings, investments, college savings, insurance, retirement, tax planning, and estate planning.

Each plan should be tailored to your needs and provide a disciplined approach to achieve your financial goals. Financial planners will want to gather data from your personal and financial life and make forecasts to achieve wealth. Hiring a financial planner is a good starting point when you are in the early stages of accumulating assets or already have substantial assets but need guidance in their complex financial situation.

A core financial plan includes:

Cash flow management will look at the specifics of your current and projected budget and net worth, debt management, creating an emergency fund, savings for a house, vacations, college tuition, and retirement.

Risk management will consider life, disability, and medical insurance protection for you and your family.

Wealth management will address investments, diversification, risk tolerance, and asset allocation.

Related Post: 10 Tips To Diversify Your Investments

Tax and retirement planning should provide strategies to minimize your tax burden using capital gains strategies, charitable giving, tax-free and tax-deferred retirement savings. Advisors should speak with their clients about what kind of lifestyle they expect for their retirement years.

Estate planning involves questions about wealth transfer to loved ones most appropriately and efficiently.

Related Post: Your Guide To Basic Estate Planning

This Designation Is Preferable

Certified Financial Planners, or CFPs, have an essential designation issued by the Certified Financial Planner Board of Standards. This designation is difficult to obtain. It requires passing rigorous exam testing in specific personal finance areas. The CFP certification is distinct from CFAs, also or certified financial analysts who are highly respected in the investment analysis field.

CFPs must commit to continuing education on financial and ethical matters. They need at least three years of experience and must adhere to pretty stringent standards to earn and maintain their title. Before hiring a financial planner, you should verify the status of anyone claiming to be a CFP and whether he/she has undergone a disciplinary process.

When choosing a financial planner, CFP credentials may provide added comfort and confidence in your choice. However, it is not a guarantee of excellent performance. You want to pick the right financial advisor or team with the right fit for your needs.

Look For A Fiduciary

At a minimum, you want planners who are experts, professional and trustworthy. You should pick your planner who adheres to the fiduciary standard. The fiduciary standard is a higher standard requiring the planner or investment adviser to act in the best interests of their clients at all times.

Fiduciary duty standard is the highest standard of care referring to the financial professional.  A fiduciary is someone who holds a legal and ethical relationship with clients. They manage people’s money in their clients’ best interests rather than in their interests.

Registered Investment Advisors or RIAs help you manage your assets, mainly by way of your investment portfolio. These professionals are knowledgeable about market patterns, investing in stocks, mutual funds, and other securities. They are fiduciaries making similar recommendations to a CFP. Their pay structure is fee-based but earns commissions from the sale of financial products. CFAs or chartered financial analysts are highly respected in the investment analysis field, distinct from financial advisors.  

Don’t Paint Advisors With A Broad Brush

Investment advisers and brokers who work for broker-dealers and offer investment advice are primarily commission-based. They may have obtained CFP credentials through the hard work required.

From my experience, you cannot paint these individuals with a broad brush. Many are product salespeople interested in selling the latest service from their firm, yielding commission dollars. Other advisors are problem-solvers for their clients, helping them to manage their assets as a business. If you are fortunate to find one of these value-added professionals, grab them.

In contrast to the stricter fiduciary standard, FINRA requires the suitability standard for financial professionals who work for broker-dealers. Suitability is a lower standard than the fiduciary standard, which means the financial professional should only make recommendations suitable for their clients. A recommendation doesn’t have to be consistent with the individual’s objectives and profile.  For example, buying risky securities would not be suitable for retirees.

Financial Planners With Specialities

You may be seeking a financial planner for a specific goal like buying a house, retirement planning, or estate planning. Some planners specialize in particular areas such as addressing families with special needs, women executives or planning for single people.

Related Post: 10 Ways For Women To A Financial Independence

Look For Fee-Based Only Planners

The pay structure differs for different financial professionals from fee-based-only or charging flat fee, commission-based only, or a blend. When you want to develop a financial plan, I recommend seeking a fee-based adviser with more incentives to help with your financial goals. Fee-based structures can be fees by the hour, a flat fee for your plan, or a percentage of your annual assets.

Hourly rates may be in the $100-$400, with one-time financial plan costs of $1000-$3000+, and annual fees of percentages ranging 1%-2% of assets under management (AUM). Finding a planner that charges a flat rate or by the hour is best for those just starting to make money, who want a simple financial plan, and don’t yet have many assets.

Alternatively, you may want to consider Robo-advisors, such as Betterment, Wealthfront, Vanguard Personal Advisor Services, and  Schwab Intelligent Portfolios. Robo-advisors are an excellent option for those seeking low-cost financial advice and zero account minimum.

These providers have a range of investment and retirement planning services, digital planning tools and may provide access to human financial advisors. Their management fees vary from 0.25%-0.50% or flat annual fees. Some people prefer a human financial advisor for a specific part of their financial plan and several Robo-advisors offer blended services for a higher fee.

It Depends On Your Needs

You may be seeking a one-time financial plan after getting a sizable bonus or an inheritance. Others want to have a planning team to be able to work with them on an ongoing basis. There are a plethora of financial strategies to handle for a family moving through changing life cycles.

Trustworthy financial planners can help you build wealth with a disciplined approach. They may help you alleviate the financial stresses that you encounter when saving for a house, college tuition, insurance, and retirement using the most tax-efficient strategies.

When you have a busy career earning a high income, it may be challenging to wrestle with these personal finance specifics. Paying $10,000-$20,000 annually on a $1-$2 million portfolio that may produce savings isn’t bad.

Many traditional financial planners require a minimum of assets to invest, usually in the $250,000 range or significantly higher, and may not work with you. Other planners may prefer to grow with beginner clients to add a lot of value, particularly as clients have expanding family needs.

Where To Find The Right Financial Planner

The National Association of Personal Financial Advisors (NAPFA)  are fee-only planners who adhere to the fiduciary standard. They accept no commission-based planners. Their standards are high and generally meet or exceed the requirements needed for CFP credentials. Ask your friends and colleagues if they would recommend someone to you.

If you are just starting with fewer initial planning needs, you may consider the Garrett Planning Network. They are certified financial planners or persons working towards obtaining their credentials. They tend to focus on smaller projects for an hourly fee.

XY Planning Network is relatively new, focusing on young professionals looking for fee-based financial planners with the CFP designation. Their organization serves Generation X and Millennials. Their fees appear to be within the ranges of hourly rates or flat fees.

There are great Facebook Groups to visit, such as Females And Finance, run by Sheryl Hickerson, to help you find the right person for you. Women, in particular, have distinct needs for financial planning.

Do I Need A Financial Planner?

You can develop a simple financial plan on your own as you are starting. Even if you do not work with a financial planner, you need to consider your short-term and long-term goals. Managing money well is time-consuming and requires expertise in many areas.

As your assets grow, you may need guidance and assistance in developing financial strategies.

 10 Questions You Should You Ask When Seeking A Financial Advisor

Professional Caliber

  1. What are your qualifications, credentials, and experience?

You will want to know who you are dealing with in terms of expertise, education, certifications, and experience.

  1. Do you work with a team, and how do you work together?

Financial planners often have their specialties and overlap with others who can complement their skills.

  1. Are you a fiduciary?

A fiduciary standard is a more stringent duty of care. When speaking to a professional financial candidate, you want to understand how they view their role to you. It is your money and your financial future. You want your advisor to be working on behalf of your best interests, not theirs.

What Does This Cost

  1. What are your fees, and what are my costs all-in?

Understand their fee structure. Be clear about the extra costs you may incur, such as buying an insurance policy.

  1. How will I be communicating with you and your team?

Biannual plan reviews are common. How often will they be reviewing your financial plan with you?  If you will have an ongoing relationship with your financial planner, it is essential to understand how you will review and update your plan. What kind of communication should you expect, particularly when you are making changes.

  1. How will they work with you?

Will they take the time and have the patience to explain complex concepts to you. This information does matter, and it may take time to build confidence and a good rapport.

Characteristics of Your Financial Planners

  1. What is your investment philosophy? You want to understand your planners’ fundamental beliefs regarding growth and value investing. Markets can be turbulent, so you need to know how they may address investments during recessions.
  2. How should I measure success in our financial plan?

You need to understand the benchmarks that will provide you with results relative to your financial goals. There may be different measurements for various aspects of your plan.

  1. What added value may I expect from you as our financial advisor?

This question is tricky. Of course, you should expect expertise, professionalism, and trust. You want to know what kind of relationship you will have. When you want to make an investment that advisors believe is not a sound one, will they tell you “No”? They must have your back.

  1. What are some of the criticisms your clients say about you and your team?

No one person is perfect, so knowing those criticisms will help you measure your prospective financial planner and how he/she fits with your needs.

Final Thoughts

Prudent financial planning is vital to achieve your short- and long-term goals and to support your family values. We outlined the characteristics of a financial planner or advisor, the varying fee structure, and how to pick the right financial advisor for you.

What are you looking for when seeking out a financial advisor? What traits are essential to you? We would like to hear from you!

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How To Do Taxes On Your Own: Your Complete 2021 Guide

How To Do Taxes On Your Own: Your Complete 2021 Guide

If you earn a steady income or even an inconsistent one, you’re likely paying taxes or on the hook for them. Employers withhold taxes each pay period from their employees’ paychecks, sending them to the IRS and your relevant state and local governments.

But that’s only the first step in the process of handling your taxes. You’ll need to consider tax deductions and credits as well when looking to lower your taxable income. The last thing you want to do is wait until tax season rolls around and then find yourself scrambling to figure out how to do your taxes on your own.

That’s why we created this step-by-step guide for the typical person who wants to learn how to prepare their taxes at home without all of the stress that comes with doing it themselves.

How to Do Taxes on Your Own



Why Do I Have to File a Return?

You have to file a tax return because you’re probably a taxpayer. The IRS considers taxable income as all income from whatever source derived, including gains realized, unless otherwise excluded.

If you have enough income, the IRS looks to tax in one year to exceed the standard deduction for your filing status. Then it’s time for you to do your taxes on your own and file that return with the appropriate government agency. If not, you might still consider filing a tax return.

One of the significant learnings from 2020 and 2021 has been the value of filing your tax return regardless of need. Filing a return allowed millions of people to receive each of the three rounds of stimulus checks that came out due to the pandemic.

Therefore, you’ll want to save the correct paperwork to prepare your taxes, even if you don’t exceed the standard deduction and don’t technically need to file.

If you exceed the standard deduction, filing your return gives you the chance to reconcile your tax bill with the IRS. You might have overpaid through paycheck withholdings, entitling you to a tax refund you can spend how you please.

Likewise, you might have underpaid and need to cut Uncle Sam a check. Not the best scenario, but better than having the full brunt of the federal government come after you for the money you owe.

To fight against this happening again in the future, be sure to file an Amended Form W-4 with your employer asking to withhold more in taxes for the current tax year. That will avoid the nasty surprise that shows at the bottom of your tax return.

How to File a Tax Return on Your Own

To prepare your taxes on your own, you’ll need to assemble the correct paperwork. That includes all of those forms that have been coming in from various sources:

  • Form W-2: Wage and Tax Statement
  • Form 1099-NEC: Nonemployee Compensation
  • Form 1099-MISC: Miscellaneous Income
  • Form 8949: Sales and Other Disposition Assets
  • Form 1120: U.S. Corporate Income Tax Return

Not to mention the paperwork related to your situation or small business. Things like:

  • payment invoices
  • receipts for deductible expenses
  • detailed expenses related to your trade or business
  • contributions to non-profit organizations or charitable donations

The list goes on and on. If you plan to take a specific deduction that requires documentation, make sure to hold onto anything and everything if the IRS looks for supporting paperwork.

Once you have this information squared away, it’s time to prepare your taxes using Form 1040, Individual Income Tax Return. You can file 1040 manually by filling out and mailing the form to the IRS.

Filling it out by hand can be time-consuming, but you’ll have complete control over how you prepare your taxes. However, math errors can result and are likely best avoided.

Instead, you might consider using tax software through a service like TurboTax. It will walk you through each section of your 1040, asking you questions about your income, deductions, credits, and filing it for you electronically.

Well worth the cost in many cases, especially if it avoids computational errors on a mailed-in paper form and the IRS comes calling. You can also receive help by contacting a tax professional directly to solicit their services.

How Income Tax Brackets Work

When you begin tallying your income earned for the year, you will eventually end up with your “gross” income from all sources. This includes your wages, tips, self-employment income, investment income, real estate income, and more.

It also includes income from signing up to a company that offers incentives to open an account. If you learned how to get free stocks from apps like Robinhood or even sign up bonuses from SurveyJunkie or other apps, that money technically counts as taxable income. You’ll need to report this on your tax return.

When you’ve calculated your total gross income, you can then subtract the relevant tax deductions and credits to your situation to reduce your gross income to your adjusted gross income and, finally, taxable income. From here, you then figure out how much taxes you owe based on the progressive set of seven income tax brackets used by the IRS.

This progressive system means for higher levels of taxable income, you pay a commensurately higher effective tax rate. For example, if you earned $100,000 of taxable income as a single taxpayer, you’d fall into the 24% tax bracket.

  • Your income between $0 and $9,950 gets taxed at 10%
  • Your income between $9,951 and $40,525 gets taxed at 12%
  • Your income between $40,526 and $86,375 gets taxed at 22%
  • Your income between $86,376 and $100,000 gets taxed at 24%

Each year, the IRS adjusts these brackets to account for inflation.

How to Calculate Your Taxes

If you work as an employee, your employer will send you a Form W-2 in the mail and possibly electronically. This documents all the details related to your pay, deductions, and other elections made during the tax year.

It includes your gross pay, pay withheld and remitted to the IRS, as well as other money used to pay for various deductions like your 401(k), health savings account (HSA), life insurance, and more.

If you’re self-employed, you should expect to receive 1099-NECs from any company that paid you $600 or more during the tax year. Once you gather all of this information, you’ll also need to track all of your receipts and other documents substantiating your costs of doing business.

One way to avoid paying income taxes is through investing in assets that pay qualified passive income. These are some of the best assets to invest in because you can receive income but not pay taxes on it.

Such examples include qualified dividend income, municipal bond income, or long-term capital gains on the sale of certain assets. For these to be tax-free, you’ll need to have income below certain levels, however.

How to Reduce Your Taxable Income

Now that you know a bit about the income side of the ledger, you might want to learn a bit more about how you can lower this income in the eyes of the IRS.

Aside from having certain types of income, the IRS awards better taxation preferences. You have two levers to lower your taxable income: tax deductions and tax credits.

Tax Deductions

Tax deductions work by reducing your taxable income on a dollar-for-dollar basis.

For example, if you earned $100,000 of gross income and claimed the standard deduction as a single taxpayer in 2021, you’d have a reduced taxable income of $87,450 ($12,550 standard deduction in 2021).

There are many different ways to do this: some items will give you a deduction no matter how much money you make. Others only work if you have low taxable income.

Here’s an overview of the most common deductions:

  • Standard deduction
  • Student loan interest deduction
  • Charitable donations deduction
  • Medical expenses deduction
  • State and local taxes (SALT) deduction
  • Gambling loss deduction
  • Employer-sponsored plan and IRA contributions deduction
  • Health savings account contribution deduction
  • Self-employment expenses deduction
  • Educator expenses deduction
  • Mortgage interest deduction
  • Depreciation expense deduction
  • Health insurance premiums deduction for freelancers

There are many, many examples of tax deductions to consider when looking to lower your taxable income. Deductions reduce your taxable income, thereby lowering the taxes you pay indirectly and less effectively than tax credits.

If you are self-employed or own a small business, you’ve got a bevy of tax deductions you can use to lower your taxable income considerably.

My wife, who works as a dermatologist in Pleasanton, knows she needs to keep track of her expenses because her employer runs his practice network of clinics as a small business owner. He minimizes his business income taxes by capturing eligible expenses to reduce the taxable income of his business.

He also keeps track of anything which might qualify him for business tax credits as well.

Whether a business or individual taxpayer, all things equal, a tax credit carries more use than a tax deduction.

Tax Credits

Tax credits work by reducing the amount of tax you owe on a dollar-for-dollar basis. This is different from a tax deduction which reduces the taxable income on your W-2, 1099s, or other types of income that get taxed. Tax credits look at your total tax liability after calculating what you owe and reduce it on a dollar-for-dollar basis.

Tax credits come in two flavors: refundable and non-refundable.

Refundable tax credits allow you to lower your tax liability dollar-for-dollar and pay you any excess credit value if your tax liability turns negative. For example, if you owe $1,500 in taxes but you can claim a $2,000 refundable tax credit, not only will your tax bill go to $0, it’ll trigger a $500 tax refund to you.

Such examples of refundable tax credits include:

  • Earned Income Tax Credit
  • American Opportunity Tax Credit
  • Child Tax Credit (partially)
  • Premium Tax Credit (partially)

Conversely, non-refundable tax credits also work to lower your tax liability on a dollar-for-dollar basis but differ from how the unused portion gets treated. If you qualify for a non-refundable tax credit that pushes your tax liability to $0, the unused balance does not come to you as a tax refund.

Instead, you might have this balance roll forward to future years as a future income tax offset, or you might forfeit the unused balance altogether.

Some examples of non-refundable tax credits include:

  • Child and Dependent Care Credit
  • Adoption Expense Credit
  • Foreign Tax Credit
  • Lifetime Learning Tax Credit
  • Retirement Savings Contribution Credit
  • Renewable Energy Investment Tax Credit

Getting Your Tax Refund (or Paying Your Bill)

After you’ve gone through all of your tax forms, gathered and tallied your eligible deductions, it’s time to put pen to paper (so to speak) and put everything in the right place.

Using tax software can make this a breeze, though if you’ve got a very simplified tax picture, you can choose to do it by hand. It’s your personal preference and will depend on how you value spending your time. You can also participate in the IRS Free File program to receive the tax software for free if you earn below a certain income level.

You should determine your tax balance owed for the year and compare this to the amount you’ve already paid through paycheck withholding or estimated quarterly tax payments made throughout the year.

If you’ve overpaid, you’re due a refund. If you’ve come up short, you’ll have to cut Uncle Sam a check. You can provide your bank account information for a direct deposit or opt for a paper check to be mailed to the address listed on your return.

Likewise, if you need to send in payment, you can use the IRS Direct Pay system to send your payment from a bank account or debit card directly to the IRS.

If you find you need more time to do your taxes independently, you can file an extension. You’ll still need to pay the taxes you think you may owe by the filing deadline, even if you haven’t completed your tax return.

Running afoul of this rule will land you in hot water with the IRS as they’re likely to come knocking (figuratively) with a bill. Not a pleasant experience by any means.

If you need assistance filing your taxes, make sure to look into tax preparation services that are available through many professional organizations, university programs, or a Volunteer Income Tax Assistance (VITA) program.

Final Thoughts

Even if you have no income or don’t earn enough to exceed the standard deduction, it may still make sense to take the time necessary to file a tax return. Those who filed found it far easier to receive their stimulus checks in 2020 and 2021. It also gives you good practice for future years when you may have enough income to file your return to reconcile your tax bill with the IRS.

This article originally appeared on Your Money Geek and has been republished with permission.

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