Keep More Money Month - Chapter 1

We will talk in the month of August about different tools, tips and tactics that can help business owners and the self-employed keep more of the money they make. If you own a business and are committed to building it, then you may be putting all your money back into it. This is considered a good practice not only because it helps grow the business with the capital you reinvest, but also because it turns into a tax deduction.

I thought about sharing some of my thoughts on tax deductions today. I have been working with many people who are looking to reduce the amount of money they pay on taxes by taking deductions for the things they do. This can be a good thing, of course, because one gets to use the money for the things they need and also pay less in taxes at the same time. The only issue I see with this strategy is when one makes purchases or spends money on unneeded stuff for the sake of the tax deductions. 

I have always believed that the most important money one should keep in their money instead of spending is the money paid on interest to other people or companies. I have come across people who don't want to pay their mortgage down faster and save the interest because they want to use the mortgage interest as a tax deduction. Well, here is the challenge with that strategy: one pays $100 in mortgage interest to save $25 in taxes (for someone in the 25% tax bracket). In this case they would be better off keeping the $75 in their pocket instead of giving it to the mortgage company. 

As a strategy to save money on taxes, many people contribute to pre-tax retirement plans, such as 401K or IRA. This is a great strategy to keep more money for the present time. For most people, it can be a good strategy long-term, given that most Americans have less money in retirement than they do while they work. However, if you plan right and build your wealth to have a worry-free retirement, you may be better off paying taxes on your current income and then receiving your retirement money tax free. This would mean a Roth account - IRA or 401K. The wisdom of this strategy comes from a popular saying that states that it is better to be tax on the seed than on the crop.

These tips and strategies don't work for every single person or every single situation. Everyone is different and their strategies need to be adapted to their situation. For this very reason, it is important to sit down with financial professionals - financial planner, CPA, tax attorney, estate attorney.

Financial Serenity Month - Chapter 4

This is the last post in the Financial Serenity Month. We have been talking about retirement planning. Before we conclude this month's theme, I would like to underline the fact that financial serenity does not have to happen at the "traditional retirement age" - it is exclusively about the ability to live according to one's wishes and standards without having to work; that is, you don't have to work in order to generate the income you need. Retirement planning is discussed in this context because that means you only work if you choose to, and not because you have to.

And if I have convinced you to start setting money aside, you may now start worrying where that money is going to go. The main objective is for the money you set aside to come back to you with friends – the more, the better. And in order for that to happen, you cannot leave it parked in a savings account. Nothing against banks, they are just not a great vehicle for increasing your net worth through savings; not with an interest rate pretty close to 0%. 

The type of investment and the company, as well as the status (qualified funds versus non-qualified funds), will depend on your needs, risk tolerance and when you need to have access to the money. All investments should be personalized for you. Therefore, either you are an expert, become an expert, or hire an expert to help you. 

The one sure way to figure out which investment will bring you the most money is using the Rule of 72. This will show you how many years it will take for your investment to double. No matter the amount you invest, don’t you want to know how long it would take for your money to double? To find this out, you would take the interest rate you receive and divide it into 72. This number signifies the number of years it would take you before your money doubles without your adding anything extra. For a 1% interest it takes 72 years to double the money you deposit – let’s not even look at under 1% (which is what you get from your regular savings account at the bank). For an 8% interest rate – the average growth of the market – it would take your money 9 years to double. Would you rather wait almost a lifetime, or would you like to double it in 9 years?

Now that you understand why it is important to have a plan to exit your business into retirement, you are ready to set a system in place. And the best thing to do is to make saving for retirement a priority. If you ever heard any financial experts talk about saving money, you are probably familiar with the phrase “pay yourself first”. There is no better recipe for retirement. Whether you can direct 10% of your income towards retirement, or you need to start with a smaller amount, it is always best to start. As you get into the habit of saving, you will find it easier and more rewarding. If you struggle in the beginning and are afraid you might run out of money for current expenses, don’t worry: you are not alone.

You will find creative ways to take care of current needs as soon as you have the system in place to redirect the money from current expenses to future serenity. Since not everyone has the discipline to set money aside for retirement on a regular basis, the best thing to do is to automate it – a set date, maybe a set amount. You can always change and adjust, you only need a starting point. And remember, you can always count on help from a financial professional if you lack the knowledge, the will or the discipline to follow through.