Archive for the ‘Money Management’ Category

Protection, Benefits & Accountability: Smart Planning for Start Ups and Small Business

Monday, August 6th, 2012


Protection, Benefits & Accountability may not be at the forefront of new and small business owners’ minds, but they should be.

 

Often ignored and/or glossed over by startups, these components are an essential part of basic business planning and can make the difference between success growth and failure.

 

You know the old adage: No one plans to fail, they just fail to plan. Use this overview to kick start your protection, benefit and accountability planning:

 

Equity Protection

 

New businesses often start with no consideration for the “What Ifs”.  What if my partner wants/needs to quit the business unexpectedly? What if my partner becomes incapacitated? What if my partner suddenly dies? A lack of planning for unforeseen circumstances such as these can literally ruin a business overnight.

 

In the case of unexpected death, when one partner passes away within a 50/50 ownership agreement, the deceased partner’s heirs would then become entitled to the deceased’s 50% share. Would this be an acceptable arrangement to you as a surviving partner? Typically, this would not be an acceptable arrangement. The last thing a start up business should have to bear is paying out to someone who is not contributing to the business, in this case, heir(s).

 

This is why smart planning also includes Buy Sell Agreements. Buy/Sells are like prenups for business – legal documents which site a buyout price for remaining partner(s) in the event of a departure/disability/death of another partner. They are typically funded by purchasing life and/or disability insurance to cover the predetermined agreed to buyout amounts.

 

►Examine all potential exit reasons thoroughly and be prepared for them.

 

Property and Liability Protection

 

Equally important to insuring buildings, equipment, and product lines, new businesses should make sure they properly protect themselves from lawsuits. People generally embrace adequate property protection but they rarely lend the same credence to liability protection – this goes for individuals too.

 

Unfortunately, in our litigious society, liability protection is something that must not be ignored because situations like these can arise quickly without warning and ultimately have a tremendous impact on your business.

 

A simple example of this type of situation could happen if an employee gets into an accident during working hours. Your company could be found liable – though the accident is no fault of your company – simply because of the employee’s affiliation with your company.

 

Industry statistics provide that businesses will bear the most financial burdens from liability issues versus the costs of property replacement.

 

►Seek the right amount of liability protection needed to fully protect your business.

 

Retirement Planning

 

Most people have heard of the terms: 401(k), IRA, SIMPLE, SEP, and Profit Sharing. For new business start ups, the real question is which one is best for your business?

 

Many plans are specifically designed to appeal to certain demographics. A SIMPLE Plan, for example, is by design targeted to small businesses interested in offering a plan but without the IRS compliance headaches of a 401(k).

 

Depending on the wants and needs of the owners and employees, each plan has a specific list of attributes and drawbacks. It is also tough to think about retirement when you’re just starting a business, but that is exactly when retirement planning should be done.

 

Engage in retirement planning at the onset of your journey.

 

Health Coverage

 

As a new business owner, you now have health insurance considerations to keep in mind. Some new businesses opt to not provide coverage for the employees. However, highly qualified employees often require this benefit in order to consider working for an employer – do not overlook the possibility.

 

Cash Options – Employers can opt to give a cash stipend to employees in lieu of health insurance to be used as they see fit. While this is often a great option for young and healthy employees, it can prove problematic for a potential employee who may not be able to qualify for individually underwritten plans.

 

Group Health Plans – Starting a group health insurance program is the other alternative: group health plans guarantee coverage for all in the group regardless of underlying health conditions. However, it is equally important to understand that insurers can rate the entire group above the standard cost range depending on the underlying conditions of members within the group. Group coverage also requires a certain percentage of eligible employees participate in order for the group to be issued and operated.

 

If you choose to go the group health plan route, the different types of coverage should then be explored: HMO, PPO, Point of Service, Indemnity. Considerations for, optional dental, long-term disability, short-term disability and long-term care should also be made.

 

Select a health plan which best serves your company objectives first.

 

Books, Banking, Tax & Law

 

Technology makes accounting, banking and tax transactions easier to record, budget and track today. Knowing what to look out for and ask about on the other hand, can easily remain under the radar.

 

If you opt for using accounting and payroll services, consistent examination of your records is still a necessity. Regardless of who does your books; your business will bear the liability of errors in reporting, depletion of funds, penalties, etc.

 

Choosing an accommodating bank is imperative: Will they process credit cards for you? Provide a line of credit when you need it? Are they fee crazy? Are they the type of bank known for working with new and small businesses?

 

Pending the legal structure and nature of your business, all potential tax liabilities should be examined at the state, local, and federal levels before you open your doors.

 

Always be aware of how your company records are being booked and tracked.

 

New business owners that can check off these considerations in confidence are heading in the right direction. For those who cannot, do not back burner them – timing can be the difference between success and failure. Seek the professional help you need and build a solid foundation.

 

Additional Reading:

 

Start Up 101 Article Index Inc.com

 

Get a Buy Sell Agreement! Forbes.com

 

5 Tips for Buying Business Insurance Small Business Administration

 

Small Business Healthcare Tax Credit  IRS Newsroom

 

Basic Business Structures Entrepreneur.com

 

Small Business Accounting Library Business Week

 

2012 Business Software Reviews Top Ten Reviews.com

 

Kurt Rusch CLU, ChFC

Questions always welcome!

 

 

 

Why Most American Workers Do NOT Participate in 401(k) s

Saturday, March 10th, 2012


67 percent of Americans workers aged 21-64 with access to employer-sponsored 401(k)’s do not participate in the pre-tax retirement plan.

 

I was absolutely floored when I read this stat published by the Employee Benefit Research Institute. There had to be a typo in there somewhere. (I double checked; there wasn’t.) Virtually then, more than two thirds of the working population (with access), don’t do 401(k)’s?

 

Know Thy “K”

 

While I often resist approaching this subject at the risk of “beating a dead horse”, it is now crystal clear; the horse is nowhere near the end of its days. Next question: Why isn’t the majority of the working population taking advantage of this benefit?

 

After much consideration, my ventured guess is this: employees opt out because there is a lack of true understanding for the machinations of 401(k) plans, benefits of participation, and costs. Of these, perceived cost may be the biggest stumbling block.

 

Deductions & Reductions

 

Deductions taken from your pay check will reduce your take home pay, but it will not reduce it in the dollar for dollar manner many assume. Because these employee contributions are made on a pretax basis, any amount contributed to the plan will reduce your taxable income. Therefore, every dollar contributed to a 401(k) will result in a reduction in take home pay of 72 cents for an employee in the 28% Federal Income Tax bracket: $1.00 – $ .28 = $ .72. Think about how that multiplies.

 

Many states will also compute their income taxes based on this adjusted figure. In Illinois, if you are in a 28% Federal Tax bracket and the 5% State Tax bracket, the true cost of your dollar contribution would be 67 cents. ($1.00 – $ .28 – $ .05 = $ .67.) Federal Tax Credits available to lower income people may reduce these relative costs even further.

 

Market Ease

 

I also believe many people opt out because they don’t understand the markets, how to invest, or much of anything having to do with finances. While that used to be a somewhat valid excuse, modern day benefit management methods are proving otherwise.

 

Investment programs have become much more automated than they used to be. Most plans now offer portfolio programs professionally managed to selected specifications. For example,  the direction of your plan can be focused on the actual target date you have in mind to begin withdrawing funds when you retire.

 

Current benefit management systems take the task of portfolio construction out of your hands and into those of professionals who balance risk and reward within the elected set of demographics. The days of having to select individual market accounts and balancing them yourself are over.

 

Deferred Advantage

 

In addition to paycheck reductions and managed assistance, another major benefit of 401(k) plans is tax deferrals.

 

All growth in these products is deferred until they are withdrawn from the account. Therefore, if you contribute $3000 per year for thirty years, a total contribution of $90,000 would have been made. If the account balance is $500,000 after this time, none of the additional $410,000 would have been taxed as it was growing.

 

Keep in mind these funds will become federally taxable as ordinary income in retirement. State treatment of retirement income varies; Illinois does not tax retirement income from 401(k)’s.

 

Bonus Benefit

 

Because most people are in a higher tax bracket while working than they are in retirement, 401(k) participation is even more beneficial.

 

Contributions for participants who fall into this norm will: allow deductions from taxable income at a relatively higher tax rate and have receipt in retirement at a relatively lower tax rate. Ultimately, you’ll be paying less tax on the income you earned.

 

One Final Nay

 

Take advantage of employer match plans! (I.e. When employers offer matching contributions to your fund when you elect to participate.) Not taking advantage of this is literally passing up free money. Opt in now and cash in later!

 

Kurt Rusch  CLU, ChFC

 

How to Interview a Planner

Wednesday, February 29th, 2012

 

Staying away from illegal interview questions is vital according to a recent CBS News blog. Do not screen people for: race, color, sex, religion, national origin, birthplace, age, marriage and disability status. You can, however, “re-work some legal alternatives”.

 

If you want to know how old someone is, ask them if they’re “over the age of 18”. If you want to know if they have kids, ask them if they’re “willing to travel”. That last one is interesting, because it naturally assumes people with kids don’t want to travel – who does, really? (For work, that is.)

 

Keeping these guidelines in mind, what should you ask the person you may ultimately entrust with your personal and confidential information?

 

Query Their Professional Age

 

You do want to know how long this person has been working in the business. Short of “carding” them, ask them to tell you about their work experience. How long have they worked with the carrier(s) and brokerage house(s) they represent? When did they get their accreditation(s) and how long have they held each of their industry licenses?

 

A word of caution: If you run into someone who advertises or speaks in terms of “big returns”, “no risk”, or “guaranteed appreciation”, run for the hills! The SEC and a slew of other governing agencies haven’t caught up with them yet.

 

The financial services industry is strictly regulated with regard to the way financial professionals are allowed to talk about their services. This pertains to anyone handling: stock/bond/commodity trades, life insurance, annuities, retirement accounts and the like.

 

Get a Complete Service List

 

When you hire a professional advisor, look for one who can shed light on your big picture. Those who handle life, health and property insurance, in addition to financial services will be able to serve your interests best with a complete profile in hand.

 

The key theme here is to avoid the pitfalls of mixing apples and oranges. The last thing you want to do is spend more than you have to with cross over coverage or waste money on products you don’t really need. Working your complete profile will also avoid the demise of ineffective protection and planning.

 

Fee or Free?

 

Many planners market themselves on the premise that charging fees guarantees honest service. They say this because charging you like an attorney demonstrates they are not beholden to any one service provider.

 

Working with a Planner/Advisor that is a Broker (who won’t charge you fees upfront) can also provide objective placement on your behalf. Professional planners who are brokers contract with multiple insurance carriers and investment houses that pay them commission on orders they place. (Keep that in mind if you opt to work with a fee based planner – use it to negotiate cheaper billing rates.)

 

On the opposite side of the spectrum are “captive agents” – those who work for (and are beholden to) a single carrier or investment house. While they do not charge fees for their services they are employees.

 

In recent years some insurance carriers such as, Allstate, have branched into financial product lines. To date, however, they do not provide one advisor to serve their customers’ multiple needs. In this scenario, finding the best advisor for your needs is left to chance.

 

Take Away

 

Look for someone with professional designations licensed in multiple product lines. Ask them to share their experience with you and request a complete list of services.

 

Work freely with a Broker Advisor. Planners who are brokers have access to numerous companies which gives them an edge on finding the best solutions for their clients.

 

If your Cousin Joey is a captive agent with State Farm, don’t shy away from working with a professional planner. Just make sure to let your advisor know about everything you have in place.

 

Kurt Rusch  CLU, ChFC

 

Follow Your Money For Answers

Monday, February 27th, 2012

 

 

According to the Bureau of Labor Statistics, more than half of the money we spend goes to housing and transportation. Reading about the breakdown of consumer spending, started me wondering…

 

1)      Why do we naturally bristle at the thought of saving money?

2)      Why does the discipline of wise money management overwhelm us?

3)      Why are we so great at finagling funds for fun, funky and frivolous stuff?

 

If you can relate (and honestly, who can’t?), you might be interested in knowing there is quite a plethora of documented theory that speaks to these questions and more published under “Behavioral Economics” and “Behavioral Finance”.  In simple terms, these theories address how social, cognitive and emotional factors affect our economic decisions. If you care to read historical timelines and academy, find them here: Wikipedia, AOBF and Neuroeconomics – yes, there is such a thing as Neuroeconomics – it is a focus for explaining “human decision making”.

 

 

Mental Accounting

 

Investopedia.com offers insights as to why we do and don’t spend certain resources under the auspice of, “Mental Accounting”. This concept suggests that much can be learned from the way we separate and allocate our money.

 

Mental Accounting is a subjective view of money. For example, when we earmark paychecks for monthly living expenses but think of “found” or unexpected money, such as tax refunds and lottery winnings, as money that can be freely spent, it is a subjective allocation.

 

Conversely, unemotional and logical money management does not recognize a difference between a $2,000 paycheck and a $2,000 winning lottery ticket – $2,000 dollars is $2,000 dollars regardless of source. (See the full tutorial here.)

 

Follow the Money

 

How can we nip Mental Accounting in the bud? Try following your money around for the next month in words – literally. If you’ve ever dieted, you know how helpful keeping a food diary is. No one likes doing them, but it is the most telling tool you can give yourself. Write down what you spend, allocate, and save every day – what, where, and why you spent it too. This includes the checks you write on your monthly bills.

 

At the end of the month you will be able to detect the way you think about money and possibly find some red flags you hadn’t seen (or thought of as such) before. For example, are you holding onto low interest bearing accounts and making high interest rate credit card payments? Could you pay off a small debt right away by using some of your ‘fun’ money? Are you keeping spare change in a can or buying dollar scratch offs?

 

Brace yourself, all those trips to Starbucks, Subway and Super K may just rise up and slap you silly across the face. Good luck.

 

Kurt Rusch  CLU,ChFC